Equilibrium in the loanable funds market is initially present at a stable price level (zero inflation) and a nominal (and real) interest rate of 4 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 6 percent,

Question

Quizplus · Accepted Answer

According to the Fisher effect, the nominal interest rate adjusts one-for-one with changes in inflation expectations, while the real interest rate remains unchanged. Therefore, if inflation increases from 0% to 6%, the nominal interest rate will increase from 4% to 10%. However, the real interest rate will remain at 4%. Therefore, choice B is the correct answer.

Equilibrium in the Loanable Funds Market Is Initially Present at a Stable