Dse 2009 ques 17

[cheesecake]

In the islm framework, an increase in the expected rate of inflation results in
a) an increase in the equilibrium value of income and an increase in the equilibrium value of real interest rate
b) a decrease in the equilibrium value of income and a decrease in the equilibrium value of real interest rate
c) an increase in the equilibrium value of income and a decrease in the equilibrium value of real interest rate
d) a decrease in the equilibrium value of income and an increase in the equilibrium value of interest rate

The answer is c but i think it should be d
If ecpected price level increases, AS shifts up. There is movement along the AD curve. Income falls and price risea. Correspondingly in the ISLM framework LM shifts to the left. Output has fallen and interst rate has risen.
What is wrong with this? :'(

[naren]

if expected rate of inflation increases,
then nominal interest rate would rise in future. So people try to save more and money demand falls but money supply remains same. So to remain in equilibrium i.e money demand is equal to money supply, the income rises. This has to be done by LM shifting right.

[saumya singha]

hey cake, there is no movement along the curve, see, there is an increase in the nominal int rate due to change in inflation hence causes the shift in the money dd curve ,now money demand has shifted due to the change in 'i' but 'Y' is still constant ,hence there is a shift in the LM curve and if we go further,in the AS curve also.
Any movemnt along any curve in x-y space happens when both your x and y are changing together, but shift happens when we keep one of the variables constant and change the other.