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Q. Explain IS curve with inflation?
The IS curve with inflation
We can draw IS curve for a given value of πe. As earlier explained, IS curve isn't affected by changes in P. Though it will shift upwards when πe increases.
Figure: The IS curve and expected inflation.
If πe increases, R should increase by the same amount to keep r and YD unaltered.
The production function is Q=3LK
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