Such an increase in the nominal and thereby the real interest rate causes C, I, and X to fall. By choosing different values for inflation, we can calculate the nominal interest rates from the monetary policy rule line and determine the impact on the short run spending balance. Observe that the higher is the inflation rate, the higher is the nominal and thereby the real interest rate. Thus the relationship between inflation and aggregate expenditure and real GDP is inverse. The overall inflation rate indicates the average change in the prices of the firm's competitors.
Firms also respond to changes in the demand for their products.
If, for example, a firm is used to changing its price at the rate of inflation and suddenly observes a relatively low demand for its product in the current year, it will increase its price at a rate lower than the inflation rate. This type of price adjustment occurs when the change in GDP is driven by changes in demand. In the short run, the inflation rate is relatively steady. So the price adjustment line is flat.