The current nominal interest rate is 9 percent. If the expected inflation rate changes from 2 to 3 percent (ceteris paribus), it follows that the demand for loanable funds will

Question

Quizplus · Accepted Answer

When the expected inflation rate increases, the real interest rate (nominal interest rate minus inflation rate) decreases. This generally makes borrowing more attractive (since the cost of borrowing is effectively lower) and saving less attractive (since the real return on savings is lower). However, the effect on the demand and supply for loanable funds cannot be determined solely based on the information given and does not directly correspond to any of the options provided, making "none of the above" the correct choice. The relationship between inflation expectations and the demand and supply for loanable funds is more complex and depends on various factors including expectations of future inflation, the responsiveness of savers and borrowers to changes in the real interest rate, and the overall economic context.

The Current Nominal Interest Rate Is 9 Percent