ECO-306-The Expected- inflation effect

ECO-306-The Expected- inflation effect - Yunchen Shen...

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Yunchen Shen (Jenny) The Expected- inflation effect Table 1. Source: http://home.cerge-ei.cz/pstankov/Teaching/AAU/Reading/Mishkin4.2.pdf From the table 1, increase the money supply might cause the interest rate fall from i1 to i2. However, the higher inflation rate results from an increase in the money supply also influence interest rates by affecting the expected inflation rate. When money supply increase usually cause people to expect a higher price level in the future, therefore the expected inflation rate increase. Table 1.1 Source: http://home.cerge-ei.cz/pstankov/Teaching/AAU/Reading/Mishkin4.2.pdf The bond supply and demand framework has shown us that this increase in expected inflation causes the supply of bounds goes up and the supply curve shifts to the right, and it cause a higher interest rates. In the table 1.1, we can see when expected inflation increase, the supply curve shifts from Bs1 to Bs2 and the demand curve shifts from Bd1 to Bd2. The equilibrium bonds price decline from p1 to p2 and the interest rate rises. Thus, the expected
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ECO-306-The Expected- inflation effect - Yunchen Shen...

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