SP - Stabilization Policies Discussion 22 22 Inflation and expected inflation are important determinants of economic activity. a. Draw a correctly labeled graph of a short-run Phillips curve. b. Using your graph in part (a), show the effect of an increase in the expected rate of inflation. c. What is the effect of the increase in the expected rate of inflation on the long-run Phillips curve? d. Given the increase in the expected rate of inflation from part (b), i. Will the nominal interest rate on new loans increase, decrease, or remain unchanged? ii. Will the real interest rate on loans increase, decrease, or remain unchanged? e. Assume that the nominal interest rate is 8%. Borrowers and lenders expect the rate of inflation to be 3%, and the growth rate of real GDP to is 4%. Calculate the real interest rate