What's the difference between nominal and real interest rate?
nominal interest rate, i = rate of return on assets, measured in terms of dollars
real interest rate, r = rate of return on assets, measured in terms of goods
What is the Fisher Effect?
nominal interest= real interest rate + expected inflation
T/F The interest rate in IS curve is nominal. Explain why or why not.
IS: Y= C + G + I (Y, nominal interest- expected inflation)
Since IS function is the goods market in REAL terms, we use REAL interest rate, r.
[nominal interest (i)= real interest (r) + expected inflation ]
T/F The interest rate in LM curve is nominal. Explain why or why not.
Because financial market is not expressed in REAL terms
When the CB increases growth rate of money supply. How would impact on economy differ if the policy was anticipated versus unanticipated?