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Effect of Deflation on the Real Interest Rate
When prices are expected to fall, a condition known as deflation, the expected inflation rate () becomes negative. According to the Fisher equation, this causes the real interest rate () to be higher than the nominal interest rate (), thereby increasing the real cost of borrowing and the real return on lending.
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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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