Answer to Question #209611 in Finance for Syed Eassa

Question

Consider savers are taxed on their nominal income, and explain what happens to the demand curves in the loan market as inflation rises? Draw diagram to explain it..

Answer 1

If savers are taxed on their nominal income, then the supply of loanable fund will fall as inflation rises. As a result the supply of loanable fund will shift to the left as S2 which will increase Interest rate from r1 to r2.