How the change in the expected future inflation rate affect the
Concept introduction:
Loanable Funds Market: It is an imaginary market which illustrates the market result of the
Demand for Loanable Funds: It is represented by a downward sloping curve which indicates that as the interest rate increases the demand for loanable funds decreases and vice versa.
Supply for Loanable Fund: It is represented by the curve that slopes upward which means that as the interest rate increases the supply of loanable fund also increases and vice versa.
Equilibrium Interest Rate: In the loanable fund market the point where demand curve and supply curve intersect each other gives the equilibrium interest rate.
Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by Fisher effect.
Inflation: When the price of any good increases continuously for an interval of time it is called inflation.
Fisher Effect: According to this effect when there is a rise in expected inflation rate then there is always a rise in nominal interest rate provided loanable fund quantity and interest rate do not change.
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