Question

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.

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.

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

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 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?

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 tight money effect them?

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 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 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...

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