Figure 4.4

-In Figure 4.4,the most likely cause of a decrease in the equilibrium interest rate from i? t? i? is
A) an increase in the expected inflation rate.
B) a decrease in the expected inflation rate.
C) a business cycle expansion.
D) a combination of both A and C of the above.

Question

Figure 4.4
 
-In Figure 4.4,the most likely cause of a decrease in the equilibrium interest rate from i? t? i? is
A) an increase in the expected inflation rate. 
B) a decrease in the expected inflation rate. 
C) a business cycle expansion. 
D) a combination of both A and C of the above.

Quizplus · Accepted Answer

In Figure 4.4, a decrease in the equilibrium interest rate from i?t?i? is caused by a decrease in the expected inflation rate. This can be seen as the demand curve for loanable funds shifts to the left, indicating a decrease in the demand for funds at a given interest rate. This in turn reduces the equilibrium interest rate. A decrease in the expected inflation rate reduces the expected real interest rate, making investment more profitable and thus increasing demand for loanable funds.

Figure 4.4 -In Figure 4.4,the Most Likely Cause of a Decrease in of a Decrease