Give details the effect of the inflation scare on the yield curve
Suppose which there is an "inflation scare," which is, suppose market participants increase their expectations of future inflation.
1) Explain the effects of an increase in the expected rate of inflation on the equilibrium values of the nominal interest rate and the real interest rate if:
(1) The U.S. economy is initially at full employment.
(2) The U.S. economy is initially below full employment.
2) Finally, explain the effect of the inflation scare on the yield curve.