I'm looking at the relationship between the price level and the interest rate in an economy.

  • If the price level goes up, with fixed nominal money supply, the real money supply goes down, therefore, the real interest rate should go up.
  • But if real (?) interest rates go up, people would defer current consumption and prefer to consume in the future, because investing instead of consuming benefits them more than before. Thus, the price level should drop.

Is there something wrong? Am I overlooking further mechanisms, or mixing up real and nominal rates? Or is it indeed that there is a positive effect in one direction, but a negative one in the other direction?


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