ECON 2H03 Lecture Notes - Lecture 11: Nominal Interest Rate, Real Interest Rate, Fisher Equation

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To spend more without raising taxes or selling bonds, the government can print money. The revenue raised from prining money is called seigniorage. The inlaion tax: prining money to raise revenue causes inlaion. Inlaion is like a tax on people that hold money. The interest bank pays is called nominal interest rate and increase in purchasing power is real interest rate. Let i = nominal interest rate r = real interest rate. The fisher equaion: i = r + . The quanity theory and fisher equaion together tells that money growth afects the nominal interest rate. The one-for-one relaion between inlaion rate and the nominal interest rate is known as the. Ex ante the real interest rate which borrower and lender expect when the loan is made. Ex post the real interest rate that is actually realized. In the quanity theory of money, the demand for real money balances depends only on real income y.

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