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Figure: Short-Run Determination of the Interest Rate
-(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the central bank buys Treasury bills, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

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Figure: Short-Run Determination of the Interest Rate

-(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the central bank buys Treasury bills, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

Quizplus · Accepted Answer

When the central bank buys Treasury bills, it injects reserves into the banking system, increasing the supply of money. This leads to a shift of the money supply curve to the right, from MS₁ to MS₂,. As a result, the interest rate would tend to decrease. This decrease in interest rate would increase the demand for loanable funds and shift the supply of loanable funds to the right, from S₁ to S₂, which lowers the interest rate even further. Therefore, the correct answer is B.

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