Macroeconomics Exam 3: Real vs. Nominal Interest Rate – Flashcards
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nominal interest rate
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the exact interest rate as stated
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real interest rate
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a nominal interest rate adjusted for inflation
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expected inflation
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a forecast of future inflation
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term structure of interest rates
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the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; pure time value of money
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real rates
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interest rates or rates of return that have been adjusted for inflation
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nominal rates
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interest rates that have not been adjusted for inflation
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Fisher Effect
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the relationship between real rates, inflation, and nominal rates; the assertion by Irving Fisher that the nominal interest rises or falls point-for-point with changes in the expected inflation rate
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Fisher Equation
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the real rate equals the nominal rate minus inflation
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risk structure of interest rates
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the relationship among interest rates on bonds that have different characteristics but the same maturity
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Treasury yield curve
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a plot of the yields on Treasury notes and bonds relative to maturity; depends on the real rate, expected future inflation, and the interest rate risk premium
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credibility
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the idea that everyone trusts central bankers to do what they say they are going to do
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stabilization
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monetary policy or fiscal policy enacted to smooth the business cycle and stabilize growth in real GDP around its long-term trend (potential output) and reduce the output gap
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automatic stabilizer
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features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to smooth or dampen fluctuations in real GDP
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Taylor Rule
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a monetary policy guideline (developed by economist John Taylor) for determining the target for the federal funds rate
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inflation targeting
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when a central bank's monetary policy decisions are judged on how well it maintains a specific and explicit target rate of inflation
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intermediate targets
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variables that are not directly under the central bank's control but lie somewhere between the tools policymakers do control and their objectives; the quantity of money is an example
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target federal funds rate
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the FOMC's target for the interest rate at which banks make overnight loans to each other; the FOMC's primary (most important) policy instrument
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losing
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if the interest rate is less than the inflation rate, then the real rate of interest means that you're (gaining/losing) money
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high
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expected high future inflation rates lead to expected (high/low) future interest rates
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high, low
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if the public would rather hold bonds instead of cash or commodities, then it's likely that interest rates are ______ and inflation rates are ______
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GDP growth rate
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when a central bank targets the rate of inflation, it will be judged on how well it restricts to growth rate of the money supply in relation the the ________________
