expected rate of inflation

[AS]

how does an increase/decrease in expected rate of inflation affect IS and LM curves in following cases
1. in (r,Y) space
2. in(i,Y) space

plz explain all the cases.

[mrittik]

Use the Fischer's eqn: i=r+pi(assume pi is the expected inflation rate)

In (Y,r) space:

i) if pi increased then obviously r decreased, so LM curve shifts at right.
ii) if pi decrease just the reverse case.

In (Y,i) space:

There is no change in LM curve becoz whether pi increased or decrease it has no effect on i.

u are requested to consult Dornsburg too.

[AS]

hi mrittik

 it is i that enters in LM curve not r.how does r shifts LM curve.

wouldnt it affect IS curve

if i consider expected rate of deflation ie  negative pi

[mrittik]

yep man i enters in LM curve because of the eqn: M/P=aY-bi....expected inflation only works on LM curve...i think expected inflation rate shifts AD....but on IS there is no effect