The accompanying graph represents the market for loanable funds in the hypothetical country of Bunko. Assume the market is initially in equilibrium and inflation expectations are 2%. a. Adjust the graph to demonstrate the effects of inflation expectations increasing from 2% to 4%. b. What is the real interest rate after the change in inflation expectations? 5% 3% 2% 7% Interest rate (5) 10 9 8 7 6 4 2 1 0 Market for Loanable Funds V Scroll

The accompanying graph represents the market for loanable funds in the hypothetical country of Bunko. Assume the market is initially in equilibrium and inflation expectations are 2%. a. Adjust the graph to demonstrate the effects of inflation expectations increasing from 2% to 4%. b. What is the real interest rate after the change in inflation expectations? 5% 3% 2% 7% Interest rate (5) 10 9 8 7 6 4 2 1 0 Market for Loanable Funds V Scroll

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Interest rate Central bankers in Widgetsa have decided that inflation is too high and contractionary monetary policy is needed. First, position LRAS where it would be if contractionary policy is needed. Then, show the short-run results of this policy action by shifting the appropriate curves on the graphs. Quantity of loanable funds Demand LRAS Supply Price level Select all of the actions that are contractionary policy choices the central bankers could use. increase taxes sell bonds to banks decrease government spending raise the interest rate for last-resort loans decrease reserve requirements Real GDP AD SRAS
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