Re: DSE 2009

Posted by duck on Apr 25, 2012; 1:51pm
URL: http://discussion-forum.276.s1.nabble.com/DSE-2009-tp7496921p7499436.html

Hi Manvendra.. :)

Expected inflation = Nominal int rate(i) - Real int rate(r)

Suppose, we are plotting in (Y,r) space.
Now, Increase in expected inflation will have no impact on IS equation because IS is a function of (r,Y)
But, it will result in a downward shift in LM curve because a real interest rate must reduce to get the old level of nominal interest rate (that is, i = r + expected inflation.. so, an increase in expected inflation would result in a decrease in "r" to keep the same level of "i" )

Hence, Equilibirum level of putput rises and "r" decreases.