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.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

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.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

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
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.
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?
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)?
How does easy money affect (a) interest rates, (b) the money supply, and (c) aggregate demand?...
How does easy money affect (a) interest rates, (b) the money supply, and (c) aggregate demand? How does tight money effect them?
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.
Consider a closed-economy IS-LM model. Assume initially the economy is at medium run equilibrium. Discuss with...
Consider a closed-economy IS-LM model. Assume initially the economy is at medium run equilibrium. Discuss with the help of graphs the effects of a decrease in consumer sentiment for output, interest rates and price level in the short run as well as in the medium run. Be sure to explain how the economy transitions from short run to the medium run.
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