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Relation between nominal interest rate, real interest rate and inflation
If we denote the nominal interest rate by R, the real rate by r and the expected inflation by pe then the real interest rate is defined by:
r= R- pe or R= r+ pe
Let the real interest rate, i r , equal 5 percent and the rate of depreciation, d, equal 10 percent. In this case, if the price of a piece of capital is P K = $10,000, what is th
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