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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 + pe. Expected inflation pe 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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Suppose that quantity demand falls by 30% as a result of a 5% increase in price. What would be the price elasticity of demand for this good?
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