Using the graph below of the supply of loanable funds, SLF, and the demand for loanable funds, DLF, discuss the following:

What is meant by the equilibrium rate of interest ?Illustrate and discuss how an autonomous increase in the expected rate of inflation will change the equilibrium nominal interest rate. Consider an initial real rate of interest of 3 percent and an expected inflation rate of 4 percent. If the expected rate of inflation rises to 6 percent with the real interest rate constant, what would the resulting nominal interest rate become, using the Fisher relationship? HINTS: Recall the Fisher relationship where (1+i) = (1+r)(1+pe), where i is the nominal interest rate, r is the required real rate of return before taxes, and pe is the expected rate of inflation.) DLF = I + G - T + NX; I = real investment; NX = net exports G - T = the government deficit (excess of government spending over tax revenues). SLF = S + Ms - H; S = private savings; H = desired hoarding Ms = change in the money supply (a Federal Reserve action)

SLF Interest Rate(%) it DLF + Loanable Funds ($)