business-based

/in /by

The Fisher equation says that the nominal interest rate equals the real interest rate plus the expected inflation rate.

Using the data linked to above, calculate the real interest rate on the 10-year T-bond rate from 2000-2020 (both datasets are monthly).  Use Excel to do this, and graph the real interest rate you calculated.

Is this a ex poste or ex ante real interest rate? Explain movements in the real interest rate over this period.

2. Consider the following addition to our simple model, where people’s ability to consume imports are also affected by short-run output:

  • Assuming the rest of the model is the same, derive the new IS curve with this new consumption function. 
  • How does its slope differ from the original IS curve, and why?
  • Does this change in the model increase the power of monetary policy?  Why or why not?