KungFuPanda

Dreary Wrote:
-------------------------------------------------------
> To get the inflation effect easily, think like
> this:
>
> P/E1 = 1/r =====> that we already know.
>
> But r is nominal, so we can adjust it first
> (slowly) like this:
>
> P/E1 = 1/(r-inflation + inflation) =======> no
> change it's the same so far.
>
> Then use lambda (the percentage of inflation that
> passes through):
>
> P/E1 = 1 / [(r-inflation) + (1-Lambda)*
> inflation]
>
> Ignore the book's frmula.


To make it even better, the final line simplifies to:

P/E1 = 1 / (r - Lambda*inflation)