Question

7. Understanding the Fisher effect Aa Aa The following graphs show the loanable funds market. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. For each of the following scenarios, use the graph to show how the market will react to the given change in the expected future inflation rate. The following graph shows the demand and supply curves for loanable funds when the expected future inflation rate is 7.5%. Then a sudden shock to the economy causes the expected future inflation rate to fall to 2.8%. Assuming the Fisher effect holds, show the impact that this will have on the loanable funds market by shifting one or both curves on the graph Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and t snaps back to its original position, just try again and drag it a little farther. NOMINAL INTEREST RATE !Percent) 24 20 S7.5 16 12t D7.5 4 QUANTITY OF LOANABLE FUNDS

Answer 1

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