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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.
Once we have monthly data on a price index we can evaluate the inflation. In most nations, the percentage change in price index during one month is small. Hence it is more common t
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