Central Bank's Short-Run Control over the Real Interest Rate
A central bank influences the real economy by controlling the real interest rate (), which it achieves in the short run by setting the nominal policy rate (). This control, governed by the Fisher equation () under stable inflation expectations (), is a cornerstone of the monetary policy transmission mechanism. However, this power is limited to the short term; in the long run, the real interest rate is determined by the needs of supply-side equilibrium, not by the central bank's discretion.
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Ch.7 Macroeconomic policy in the global economy - The Economy 2.0 Macroeconomics @ CORE Econ
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Learn After
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