Question

Suppose that the price level is fixed in the short run so that the economy​ doesn't reach general equilibrium immediately after a change in the economy. Determine the​ short-run effects on the real interest rate and output when the expected rate of inflation falls.

Answer 1

Answer:

When the expected rate of inflation falls, the LM curve shifts up to the left because the demand for money decreases which increases the real interest rate. This shift is displayed in the graph in the picture attached.

The graph shows that the real interest rate increases and output decreases.