3. Inflation and the nominal interest rate When the actual and expected (or anticipated) inflation rates are both zero, the nominal interest rate must equal the real interest rate. How might inflation affect the nominal interest rate? The nominal interest rate is determined by the forces of supply and demand in the loanable funds market (in millions of dollars). The following graph input tool shows the market for loanable funds. Use the graph input tool to help you answer the questions that follow. You can shift the supply and demand curves by changing the values of the supply and demand shifters on the right. You will not be graded on any changes you make to the graph input tool. INTEREST RATE (Percent) 9 0 100 200 300 400 LOANABLE FUNDS (Millions of dollars) 500 Graph Input Tool Interest Rate (Percent) Quantity demanded (Millions of dollars) Demand Shifter Expected Inflation (percent) 5% If the expected inflation rate increases to 1%, then the supply of loar 6% unds will decrease increase When the expected inflation rate is zero, the nominal interest rate is rate of and a real interest rate of 3% 250 Quantity supplied (Millions of dollars) Supply Shifter Expected Inflation (percent) 250 and the demand for loanable funds will .Thus, an expected inflation rate of 1% results in a nominal interest
3. Inflation and the nominal interest rate When the actual and expected (or anticipated) inflation rates are both zero, the nominal interest rate must equal the real interest rate. How might inflation affect the nominal interest rate? The nominal interest rate is determined by the forces of supply and demand in the loanable funds market (in millions of dollars). The following graph input tool shows the market for loanable funds. Use the graph input tool to help you answer the questions that follow. You can shift the supply and demand curves by changing the values of the supply and demand shifters on the right. You will not be graded on any changes you make to the graph input tool. INTEREST RATE (Percent) 9 0 100 200 300 400 LOANABLE FUNDS (Millions of dollars) 500 Graph Input Tool Interest Rate (Percent) Quantity demanded (Millions of dollars) Demand Shifter Expected Inflation (percent) 5% If the expected inflation rate increases to 1%, then the supply of loar 6% unds will decrease increase When the expected inflation rate is zero, the nominal interest rate is rate of and a real interest rate of 3% 250 Quantity supplied (Millions of dollars) Supply Shifter Expected Inflation (percent) 250 and the demand for loanable funds will .Thus, an expected inflation rate of 1% results in a nominal interest
Chapter7: Unemployment And Inflation
Section: Chapter Questions
Problem 3.9P
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Transcribed Image Text:3. Inflation and the nominal interest rate
When the actual and expected (or anticipated) inflation rates are both zero, the nominal interest rate must equal the real interest rate. How might
inflation affect the nominal interest rate? The nominal interest rate is determined by the forces of supply and demand in the loanable funds market (in
millions of dollars).
The following graph input tool shows the market for loanable funds. Use the graph input tool to help you answer the questions that follow. You can
shift the supply and demand curves by changing the values of the supply and demand shifters on the right. You will not be graded on any changes you
make to the graph input tool.
INTEREST RATE (Percent)
0
0
100
200
400
300
LOANABLE FUNDS (Millions of dollars)
500
Graph Input Tool
Interest Rate
(Percent)
Quantity demanded.
(Millions of dollars)
Demand Shifter
Expected Inflation
(percent)
When the expected inflation rate is zero, the nominal interest rate is
rate of
and a real interest rate of
5
3%
250
0
Quantity supplied.
(Millions of dollars)
Supply Shifter
Expected Inflation
(percent)
5%
4%
If the expected inflation rate increases to 1%, then the supply of loar 6% unds will decrease , and the demand for loanable funds will
increase
250
Thus, an expected inflation rate of 1% results in a nominal interest
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