ECON 3580 Lecture Notes - Lecture 8: Irving Fisher, Nominal Interest Rate, Execution Unit
Document Summary
A constant growth rate in the money supply results in a persistent growth rate in prices (persistent inflation) at the same constant rate, when other factors are constant. Inflation does not affect the productive capacity of the economy and real income from production in the long run. Inflation, however, does affect nominal interest rates. How: the fisher effect (named affect irving fisher) describes the relationship between nominal interest rates and inflation. Derive the fisher effect from the interest parity condition: If financial markets expect (relative) ppp to hold, then expected exchange rate changes will equal expected inflation between countries: (ee$/ e$/ )/e$/ = e. The fisher effect: a rise in the domestic inflation rate causes an equal. Eu rise in the interest rate on deposits of domestic currency in the long run, when other factors remain constant. Us/l (r$, yus: in order to maintain ppp, the exchange rate must jump (the dollar must depreciate) so that.