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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 Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run prices will _____ thereby ___________the demand for money.

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Use the following to answer questions:
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 Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run prices will _____ thereby ___________the demand for money.

Quizplus · Accepted Answer

In the long run, expansionary monetary policy leads to an increase in prices. As prices increase, the demand for money also increases because people need more money to buy goods and services at higher prices.

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