What would be the effects of medium term composition of demand if we do: (effects in Investments and Consumption) 1. raise taxes 2. decrease government spending
why is the real interest rate lower when inflation is high? if nominal rate is 10 and inflation is lower doesn't it make the real interest higher? 10-5 is 5 and if inflation is 3 now it means the real rate is 7 so why is it lower?
The formula is i = r + pi where i is the nominal interest rate, r is the real interest rate, and pi is the rate of inflation. We can rearrange this to r = i - pi and see that the real interest rate is lower when inflation increases. This is because the money you will be paid back is worth less in real terms when inflation is higher.
High inflation does not lead to higher R. The central bank shifts LM to counter inflation and that is the reason why R shifts right? At least that is how I have learned it at uni
Higher inflation can lead both directly and indirectly to a higher nominal interest rate. The real interest rate will depend on the inflation and the nominal interest rate. If the Fed increases the nominal interest rate a lot, then the real interest rate will be higher for a given level of inflation. But in the medium run, the "natural" real rate of interest may be independent of Fed actions.
What would be the effects of medium term composition of demand if we do: (effects in Investments and Consumption)
1. raise taxes
2. decrease government spending
The assumption of the first example are not right, see the other comments that explain the error
why is the real interest rate lower when inflation is high? if nominal rate is 10 and inflation is lower doesn't it make the real interest higher? 10-5 is 5 and if inflation is 3 now it means the real rate is 7 so why is it lower?
The formula is i = r + pi where i is the nominal interest rate, r is the real interest rate, and pi is the rate of inflation. We can rearrange this to r = i - pi and see that the real interest rate is lower when inflation increases. This is because the money you will be paid back is worth less in real terms when inflation is higher.
@@liammalloy But you say [7:50] "higher inflation leads to higher real interest rate"...?
@@msralmjs true :=0 @Liam Malloy
High inflation does not lead to higher R. The central bank shifts LM to counter inflation and that is the reason why R shifts right? At least that is how I have learned it at uni
Higher inflation can lead both directly and indirectly to a higher nominal interest rate. The real interest rate will depend on the inflation and the nominal interest rate. If the Fed increases the nominal interest rate a lot, then the real interest rate will be higher for a given level of inflation. But in the medium run, the "natural" real rate of interest may be independent of Fed actions.