copyright 2004 south-western inflation-related topics mod 33
DESCRIPTION
Copyright © 2004 South-Western Nominal Interest Rate and the Inflation Rate Copyright © 2004 South-Western Percent (per year) Inflation Nominal interest rateTRANSCRIPT
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Inflation-Related Inflation-Related TopicsTopics
Mod Mod 3333
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Inflation and Interest RatesInflation and Interest Rates
•The Fisher effect refers to a one-to-one adjustment of the nominal interest rate to the inflation rate.
•According to the Fisher effect, when the rate of inflation rises, the nominal interest rate rises by the same amount.
•The real interest rate stays the same.
•Real Interest = Nominal Interest - Inflation
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Nominal Interest Rate and the Inflation Rate
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Percent(per year)
1960 1965 1970 1975 1980 1985 1990 1995 20000
3
6
9
12
15
Inflation
Nominal interest rate
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Types & Issues with Inflation
• Demand-pull Inflation• Politically-motivated Inflation
• Cost-push Inflation• Monetary Inflation
• Changes to the money supply (The Fed)• Disinflation• Deflation
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Demand-Pull Inflation
• More demand for goods than there are goods available
• Occurs because of •Lack of goods available•Econ expansion•Political Motivations
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Cost-Push Inflation
• Higher input costs in production drive up prices
• Can occur because of:• Increased costs overall of Land, Labor,
Capital• Increased costs due to Gov’t Regulations• Supply shocks
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Monetary Inflation and the Quantity Equation
• This is Inflation due to amount of Money Supply
• Can be due to Fed ActionsThe Quantity Equation relates the quantity of money (M) and the velocity of transactions to
the nominal value of outputM x V ≡ Q x P
M = quantity of moneyV = velocityP = the price levelQ = the quantity of output
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Disinflation
• Disinflation refers to the actions to try to reduce inflation
• Disinflation is difficult• AD/AS graph
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Deflation
• Definition• Debt Deflation• Effects of Expected Deflation• Zero Bound• Liquidity Trap
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Worksheet Practice
• Fisher effect• Types of Inflation• Monetary Equation