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

Quizplus · Accepted Answer

In the long run, the demand for money will increase due to higher economic activity or inflation, and the interest rate will increase back to its original level or even higher, reflecting the increased demand for money.

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