When the expected inflation increases, it will also increase the supply and the demand for loanable funds. An increase in expected inflation urges borrowers and lenders to borrow and lend at an increased nominal rate. This can be demonstrated with an example.
Assume the initial interest rate was 4%, and the expected inflation is 6%( per the question), the demand and supply for the loanable fund will increase by 10%. The borrowers want to borrow the same amount at 10% that they were ready to borrow at 4%, and lenders also want to lend the same amount at 10% that they were ready to lend at 10%.
The economy will attain a new equilibrium at a higher nominal interest rate. The number of loanable funds will not change because the shift in demand and supply will be equal.
Thus, equilibrium quantity depends on the real interest rate, which is unchanged.
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