Macroeconomics Exam 3: Real vs. Nominal Interest Rate

Fisher Equation

the real rate equals the nominal rate minus inflation

risk structure of interest rates

the relationship among interest rates on bonds that have different characteristics but the same maturity

term structure of interest rates

the relationship between nominal interest rates on default-free, pure discount securities and time to maturity; pure time value of money

Fisher Effect

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

expected inflation

a forecast of future inflation

Taylor Rule

a monetary policy guideline (developed by economist John Taylor) for determining the target for the federal funds rate

real interest rate

a nominal interest rate adjusted for inflation

Treasury yield curve

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

high

expected high future inflation rates lead to expected (high/low) future interest rates

automatic stabilizer

features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to smooth or dampen fluctuations in real GDP

losing

if the interest rate is less than the inflation rate, then the real rate of interest means that you're (gaining/losing) money

high, low

if the public would rather hold bonds instead of cash or commodities, then it's likely that interest rates are ______ and inflation rates are ______

real rates

interest rates or rates of return that have been adjusted for inflation

nominal rates

interest rates that have not been adjusted for inflation

stabilization

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

target federal funds rate

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

nominal interest rate

the exact interest rate as stated

credibility

the idea that everyone trusts central bankers to do what they say they are going to do

intermediate targets

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

GDP growth rate

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 ________________

inflation targeting

when a central bank's monetary policy decisions are judged on how well it maintains a specific and explicit target rate of inflation