Macroeconomics

Running head: MACROECONOMICS 1
Macroeconomics
Name
Institution

MACROECONOMICS 2
Macroeconomics
1. Fisher Effect is a theory in economics, which describes the association
between inflation, and between nominal and real interest. (Katharina Knoll et al.
2016). It asserts that the actual rate of interest is equivalent to the rate of nominal
interest subtracted the rate of inflation. The Effect has been stretched to the
examination of the international currency trading and the money supply. Yes, my
figure is consistent with the view that the growth of money is a determinant of
inflation. The growth of money affects both the inflation rate and the nominal interest
rate. For instance, if there is an adjustment in Canadian central bank monetary policy,
this would result in Canada’s rate of inflation to increase by 10% and a similar 10%
increase in the nominal interest rate (Moritz & Alan. 2013).
The graph below shows the narrow money and the CPI in Canada from 1970-
2010. There is a direct proportion of growth with each increase in the growth of
money. As the growth of money increases each year, the rate of inflation also
increases correspondingly. Between 2003 and 2004, there is a convergence of the
inflation rate and the nominal interest rate in the graph. Therefore, the growth of
money is a significant determinant in the rate of inflation in a country.

MACROECONOMICS 3
2. Yes, my figure is consistent with the Fischer’s effect which asserts that the actual rate
interest is correspondent to the rate of nominal interest subtracted the rate of inflation (Manuel et
al. 2016). The growth of money affects both the inflation rate and the nominal interest rate. A
slight increase in the monetary policy in Canada would result in a similar rise in the inflation rate
and the nominal interest rate (Òscar et al.2013). The graph below demonstrates a graph of the
long-term interest rate and the inflation rate of Canada between 1970- 2010. The long-term
interest rate is directly proportional to the inflation rate. This graph is consistent with Fischer's
effect since an increase in the long-term interest rate results in a similar rise in the inflation rate.