ECON 1BB3 Lecture Notes - Nominal Interest Rate, Real Interest Rate, Fisher Hypothesis

• School: McMaster University
• Department: Economics
• Course: ECON 1BB3
• Professor: Bridget O' Shaughnessy

Document Summary

There are 3 ways for a government to raise revenue: direct taxes, borrowing future tax, printing money tax on money. Hyperinflation is inflation that exceeds 50 percent per month. Example: suppose that a large cup of coffee at tim horton"s costs . 75 on january. With a hyperinflation, people usually go out and buy whatever they can and trade for it later. Nominal interest rate = real interest rate + inflation rate. In the long run, a change in money growth does not affect the real interest rate. Fisher effect: the one-for-one adjustment of the nominal interest rate to the inflation rate. Costs of inflation: (when inflation is what we expected to be) If inflation is unexpectedly high, wealth is transferred from lenders to borrowers. If inflation is unexpectedly low, wealth is transferred from borrowers to lenders (. 75) x 4 = 3 percent (. 75)x12 = 9 percent.