Correlation Between Money And Real Interest Rate

1576 WordsMar 2, 20177 Pages
In blue we have the interest rate in the loanable funds market, and in red, the interest rate in the money market. If the real interest rate is above the nominal interest rate, either the investment exceeds the desired savings or the supply of money exceeds the demand of money. Shifting the saving curve to the right, and the demand of money to the right, will bring the interest rate in both markets to be the same. Money and real Interest Rate Fisher tries to establish the link between money and the interest rate. For him, the interest rate fluctuation in terms of money and goods is due to money fluctuation. He argues that the number, or figure, expressing the rate of interest in terms of money does depend upon the monetary standard…show more content…
Thus, in order to compensate for every one per cent of appreciation or depreciation, one point would be subtracted from, or added to, the rate of interest; that is, an interest rate of 5 per cent would become 4 per cent, or 6 per cent, respectively. The basic argument to retain is that the interest rate is always relative to the standard in which it is expressed. Fisher then distinguishes the interest rate expressed in terms of money and in terms of other goods. However, he notes that there will be as many interest rates as many kinds of goods that we have. To the question if there is then no absolute standard of value in terms of which real interest should be expressed? Fisher propose the Real income, a composite of consumption goods and services, in other words, a cost of living index affords a practical objective standard. However, he insists that we always have to consider the value in the two periods of time, so that we must translate from money into goods not only in the present, when the money is borrowed, but also in the future, when it is repaid. Fisher focuses more in the money rate because he believes that it is the rate in terms of money with which business men deal and hereafter the rate of interest. He also notes that the money rate and the real rate are normally identical when the purchasing power is constant or stable. Fisher notes however that to translate the rate of
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