An increase in the rate of expected inflation will
A) shift the demand for loanable funds to the left (down).
B) shift the supply of loanable funds to the left (down).
C) shift demand and supply for loanable funds to the right (up) decreasing interest rates.
D) shifts demand and supply for loanable funds to the right (up) increasing interest rates.

Question

Quizplus · Accepted Answer

An increase in the rate of expected inflation will increase the demand for loanable funds, as borrowers will want to borrow more money to hedge against inflation. This will shift the demand curve for loanable funds to the right. At the same time, an increase in the rate of expected inflation will decrease the supply of loanable funds, as lenders will be less willing to lend money at a fixed interest rate that is below the expected rate of inflation. This will shift the supply curve for loanable funds to the left. The combined effect of these shifts will be to increase interest rates.

An Increase in the Rate of Expected Inflation Will