MGEA05H3 Chapter Notes - Chapter 25: Nominal Interest Rate, Potential Output, Output Gap
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MGEA05H3 Full Course Notes
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Higher inflation pushes up nominal interest rates, and lower inflation pushes them down. Inflation erodes the real value of money, and a higher interest rate is required to cover the effects of inflation and deliver a positive return to the lender. The bank of canada"s aim was to reduce the rate of inflation and interest rates: the banks policy was to push up interest rates. Short-run effects: interest rate private consump and investment real gdp recession. Long-run effects: excess supply factor prices price level inflation nominal interest rate. Short-run effect of saving: saving expenditure real gdp recession. Long-run effect of saving: recession excess supply factor prices price level saving financial capital nominal interest rate investment potential output growth. Short-run: emphasize changes in outputs as deviations from potential output, limited price and wage adjustment. Long-run: emphasize changes in output as changes of potential output, considerable wage and price adjustment takes place.