The specific relationship between inflation and the cost of capital is still in the process of being firmly established, and
in the absence of a full model to explain this relationship, this section will focus on the interconnections between changes
in inflation and subsequent changes in interest rates. Specifically, we will deal with the distinction between nominal and
real interest rates, the relationship between inflation and movements of interest rates and the relationship between the rate
of interest and the cost of capital.
In a non-inflationary world, funds