Chapter 7, Problem 3.9PA

To determine

- The effect of an increase in the expected inflation in the equilibrium in the loanable funds market.

Concepts introduced Expected Inflation - This refers to the anticipated increase in the level of prices over a given period of time resulting from the subjective views about price trends in future. In other words, prices today are affected by what they may be tomorrow culminating into expected inflation.

Fisher Effect

In the late 1930s, U.S. economist Irving Fisher established an economic hypothesis

  $i=r+{\pi }^e$ .

is implies that the nominal or the current interest rate is the real interest rate adjusted for the rate of inflation.