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Inflation causes the demand curve for loanable funds to shift to which direction and causes the...

Question:

Inflation causes the demand curve for loanable funds to shift to which direction and causes the supply curve to shift which way?

A) right; right

B) right; left

C) left; left

D) left; right

E) no change

Inflation:

inflation is the general sustained increase in the aggregate price level. Unexpected inflation can have a wealth-redistribution effect, e.g., it transfers real purchasing power from consumers to the government, and from lenders to borrowers.

Answer and Explanation:

The answer is B).

According to the Fisher Equation:

  • real interest rate = nominal interest rate - inflation

If there is an unexpected increase in inflation, the for a given nominal interest rate, real interest rate is reduced. Thus, unexpected inflation reduces the real cost of borrowing, or the real benefit of lending. Hence, at a given nominal interest rate, the quantity of loanable funds borrower want to borrow increases, i.e., the demand curve shifts to the right. Similarly, the quantity of loanable funds lender would like to supply is lower now, i.e., the supply curve shifts to the left.


Learn more about this topic:

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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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