Question

How does a decrease in expected inflation affect output and interest rates in the IS-LM model?...

How does a decrease in expected inflation affect output and interest rates in the IS-LM model? Explain. Does the Fisher effect hold in this context? Explain.

Homework Answers

Answer #1

The decrease in the expected rate of inflation shifts the LM curve to the left. It implies 'r' increases and 'Y' decreases. This can be shown in the following figure.

In the above figure, LM curve shifts back to LM1 and rate of interest rose to r1 and output falls from Y to Y1. If nominal rte of interest remind constant, a decrease in the expected rate of inflation has risen the real rate of Interest.

The fishers effect shows that the real interest rate is equal to nominal interest rate minus expected rate of inflation. Fishers effect reveals the relationship between inflation and interest rates ( both nominal and real interest rates). So that in this context fishers equation existed.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
3. In the IS-LM model, explain how does an increase in taxes affect equilibrium in-come. If...
3. In the IS-LM model, explain how does an increase in taxes affect equilibrium in-come. If you use any diagram, label your axes and curve clearly
How does inflation affect the economy's level of output
How does inflation affect the economy's level of output
what does the international fisher relation say about interest rates and inflation differentials?
what does the international fisher relation say about interest rates and inflation differentials?
Can you explain how the fisher effect theory affect GDP in relation to inflation?
Can you explain how the fisher effect theory affect GDP in relation to inflation?
Using IS-LM analysis, illustrate the effect of a decrease in the money supply on equilibrium interest...
Using IS-LM analysis, illustrate the effect of a decrease in the money supply on equilibrium interest rate and output. Explain what you are illustrating in your diagram and why the curve(s) are moving.
How does an increase/decrease in various macro factors (e.g., inflation, interest, income) impact exchange rates (i.e.,...
How does an increase/decrease in various macro factors (e.g., inflation, interest, income) impact exchange rates (i.e., cause appreciation/depreciation as well as impact on supply and demand)?
Use the IS-LM model to answer this question and assume that the central bank controls the...
Use the IS-LM model to answer this question and assume that the central bank controls the interest rate. Suppose there is a simultaneous decrease in taxes and decrease in interest rate. a. Explain what effect this particular policy mix will have on output and the money supply. b. Based on your analysis, do we know with certainty what effect this policy mix will have on investment? Explain
Use the IS-LM model to show what happens to output and the interest rate in equilibrium....
Use the IS-LM model to show what happens to output and the interest rate in equilibrium. Briefly explain how equilibrium is adjusting in the goods and/or money markets. One IS-LM graph is necessary for each part. Clearly label your graph for full credit. (a) The central bank increases the money supply (b) The government increases transfers to households (c) The stock markets are booming and household wealth increases
1. Using the IS-LM graphs, explain what will happen to output and the interest rate if...
1. Using the IS-LM graphs, explain what will happen to output and the interest rate if consumers suddenly become pessimistic and decrease their consumption spending at all levels. 2. Using the IS-LM graphs, explain what will happen to output and the interest rate if financial panic leads to an increase in the demand for money.
a. What is realised real interest rate? Can a change in expected inflation rate affect the...
a. What is realised real interest rate? Can a change in expected inflation rate affect the realised real interest rate? Explain. b. Suppose that there is an increase in expected inflation rate from 3 percent to 6 percent. Given that the after-tax expected real interest rate remains unchanged at 2 percent and the tax rate is 30 percent, find the original and the new nominal interest rates. c. Suggest ONE way in which investors can reduce/avoid the risk of unexpected...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT