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Answer the following questions on a piece of paper and submit a picture. a. In the...

Answer the following questions on a piece of paper and submit a picture.

a. In the long run, money is ___________________________.

Show the market for loanable funds with the nominal interest rate on the price axis. Show what will happen (in the long run) if there is an increase in the expected inflation rate. Think carefully about how savers and investors should react to changes in inflation. Keep you answer to part a in mind while considering this.

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Answer #1

In the long run, money is neutral which says that changes in money supply affect only nominal variables such as price of good and services, wage rate while do not affect real variables.

If there is an increase in expected inflation rate, people will demand more of funds because they have to repay money which have lower purchasing power or real money. On the other hand, lenders would reduce their supply of loanable funds as they will get back money with lower purchasing power. Both of these factors combined will raise rate of interest from "i0" to "i1" while keep quantity of loanable funds traded at same level of Y0.

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