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Q. Nominal interest rate and expected inflation?

When we have inflation, we can't, of course, presume that expected inflation is zero. So real interest rate will no longer be equal to nominal interest rate and we should use R = r + p^e. Expected inflation p^e is exogenous (even though not essentially constant. In more advanced Keynesian models you would find numerous assumptions on how expectations are formed.

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Macroeconomics, Economics

Category:- Macroeconomics
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