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11 Dec 2019

If people expect the inflation rate to decrease from 5% to 2%, explain what will happen to (1) the real interest rate, (2) the nominal interest rate, and (3) the demand for real money balances.

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Jarrod Robel
Jarrod RobelLv2
12 Dec 2019
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Related questions

Why does the monetary policy curve slope​ upward? ​(check all that​ apply.)

a. Monetary policymakers will follow the Taylor principle and respond aggressively to a decrease in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises.

b. When inflation​ increases, the supply of real money balances increases. This increases the equilibrium nominal interest rate in the money​ market, which also increases the real interest rate in the short run.

c. Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises.

d. When inflation​ increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money​ market, which also increases the real interest rate in the short run.

Suppose that the money demand function takes the form (M/P)d = L(Y, i) = Y/(5i), 

M=money
P=price
i= nominal interest rate
Y=output

(a) If output grows at rate g, what rate will the demand for real balances grow (assuming constant nominal interest rates)?
(b) What is the velocity of money?
(c) If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow?

QUESTION 11

If the demand for investment loans rises, this could be the result of

the discovery of new and better roundabout methods of production.

a lower rate of time preference in society.

a lower interest rate.

a higher interest rate.

a and c

1 points

QUESTION 12

Which of the following statements is true?

All persons have a high rate of time preference.

People with a high rate of time preference are more likely to be borrowers than people with a low rate of time preference.

People with a high rate of time preference are more likely to be lenders than people with a low rate of time preference.

A high interest rate is the cause of a high rate of time preference.

none of the above

1 points

QUESTION 13

Which of the following statements is true?

The nominal interest rate is always higher than the real interest rate since the nominal interest rate equals the real interest rate plus the expected inflation rate.

The nominal interest rate is always lower than the real interest rate since the nominal interest rate equals the real interest rate minus the expected inflation rate.

The nominal interest rate can equal the real interest rate, but to do so the expected inflation rate must be zero percent.

It is the nominal interest rate-not the real interest rate-that matters to borrowers.

1 points

QUESTION 14

If there is an increase in the expected inflation rate, then,

the supply and demand for loanable funds will decrease.

the supply and demand for loanable funds will increase.

the supply of loanable funds will decrease, and the demand for loanable funds will increase.

the supply of loanable funds will increase, and the demand for loanable funds will decrease.

1 points

QUESTION 15

If suddenly a 4 percent inflation rate (instead of a zero percent inflation rate) is expected by both suppliers and demanders in the loanable funds market, then

the demand for loanable funds curve will shift rightward, and the supply of loanable funds curve will shift leftward.

the demand for loanable funds curve will shift leftward, and the supply of loanable funds curve will shift rightward.

both the demand for loanable funds curve and the supply of loanable funds curve will shift leftward.

both the demand for loanable funds curve and the supply of loanable funds curve will shift rightward.

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