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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 in the short run the interest rate will:

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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 in the short run the interest rate will:

Quizplus · Accepted Answer

When the central bank buys Treasury bills, the money supply increases which shifts the money supply curve to the right (from MS₁ to MS₂). This causes the interest rate to decrease from r₁ to r₂ in the short run. Therefore, the correct option is C.

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