MGEB05H3 Study Guide - Midterm Guide: Real Interest Rate, Fisher Hypothesis, Nominal Interest Rate
Document Summary
W = wage paid to labour = nominal wage. R = rental price of capital = nominal rental price of capital. Profit of a firm (measured in dollar terms): The division of national income total real wage paid to labour = (w/p) l = mpl l. Total real rental paid to capital = (r/p) l = mpk k total (real) cost of production = (mpl l) + (mpk k) (economic) real profit = y (mpl l) (mpk k) For crs production function, y is completely divided between k & l. The fisher effect the fisher equation summarizes relationship among inflation rate, real interest, and nominal interest rate. Nominal interest rate (i) = real interest rate (r) + inflation rate ( Real interest rate, r, is determined by the equilibrium in the market for loanable funds. (cid:15482) classical dichotomy and neutrality of money imply that r is independent of a nochangein.
