Gibson's Paradox

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Gibson's Paradox

An observation that interest rates are correlated with wholesale prices rather than the inflation rate. Gibson's Paradox was first discussed by John Maynard Keynes in 1930; at the time, the idea was controversial, as most economists believed that interest rates correlated with changes to prices rather than the prices themselves. It is important to note that Gibson's paradox only applied when money was on the gold standard. See also: Keynesian economics.
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They focus on the impact of changes in the quantity of money on aggregate economic variables with special interest in explaining the Gibson paradox (the positive association between the nominal interest rate and the level of prices).