Week 7 (18.03.2025) - Financial Markets and Expectations
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5 Terms
Expected inflation
Real interest rate
The Present Value (PV) of all future payments
the sum of each future payment discounted to Present Value.
perpetuity formula
• PV = Present Value • C = Annual Payment (€1000 in this case) • r = Discount Rate
Suppose an economy is in equilibrium and central bank decides to pursue expansionary monetary policy.
a. What is the short-term effect of the policy on output, nominal and real interest rate?
b. What is the medium-term effect of the policy on output, inflation rate, nominal and real interest rate?
IS-LM model:
Y increases, nominal and real interest rate decreases:
AS-AD model gives that monetary policy does not have ay effect on output (remains on Yn), only inflation (prices) increase at the same rate as money growth rate. Fisher effect – nominal interest rate grows one-toone with money growth, no change in real interest rate (remains on rn).
Note 
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