In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) - , because:

Question

In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) -  , because:

Quizplus · Accepted Answer

The model assumes that households view bonds and capital as similar assets, except for differences in their rates of return. Therefore, the nominal interest rate, i, is equal to the nominal net return on capital, which is equal to the return on bonds, R, divided by the price level, P, minus the expected inflation rate, π.

In the Model the Nominal Interest Rate Equals the Nominal