How are the inflation rate the real interest rate and the nominal interest rate related to each other?
A real interest rate is the interest rate that takes inflation into account. This means it adjusts for inflation and gives the real rate of a bond or loan. The calculation used to find the real interest rate is the nominal interest rate minus the actual or expected inflation rate.
What is the relationship between nominal interest rate and money demand?
The Demand for Money Generally, the nominal demand for money increases with the level of nominal output and decreases with the nominal interest rate. The equation for the demand for money is: Md = P * L(R,Y).
What is the relationship between economic growth and inflation?
With higher economic growth, people may start to expect inflation – and this expectation of rising prices can become self-fulfilling. Therefore, rapid economic growth tends to cause upward pressure on prices and wages – leading to a higher inflation rate.
What is the relationship between the price level and the nominal money supply what is the relationship between inflation and the growth rate of the nominal money supply?
That is, inflation is equal to the growth rate in the nominal money supply (controlled by the Fed) minus the growth rate in real money demand. Notice that if the growth rate of the nominal money supply is equal to growth rate of money demand then inflation is equal to zero.
Do nominal interest rates rise with inflation?
When expected inflation changes, the nominal interest rate will increase. However, inflation will not affect the real interest rate.
What is the relationship between the demand for money and income money demand and the interest rate?
That relationship suggests that money is a normal good: as income increases, people demand more money at each interest rate, and as income falls, they demand less.