As a result of higher expected inflation,
A)the demand and supply curves for loanable funds both shift to the right and the equilibrium interest rate usually rises.
B)the demand and supply curves for loanable funds both shift to the left and the equilibrium interest rate usually falls.
C)the demand curve for loanable funds shifts to the right, the supply curve for loanable funds shifts to the left, and the equilibrium interest rate usually rises.
D)the demand curve for loanable funds shifts to the left, the supply curve for loanable funds shifts to the right, and the equilibrium interest rate usually rises.

Question

Quizplus · Accepted Answer

When inflation is expected to increase, there will be an increase in demand for loanable funds as people will need more money to cover the higher cost of living expenses. This will shift the demand curve to the right. At the same time, lenders will be less willing to lend out money at lower interest rates since they will receive less purchasing power in the future due to inflation. This will shift the supply curve for loanable funds to the left. Due to the increase in demand and decrease in supply of loanable funds, the equilibrium interest rate will usually rise.

As a Result of Higher Expected Inflation