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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 MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. 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 MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. In the long run prices will _____ thereby _________ the demand for money.

Quizplus · Accepted Answer

In the long run, prices will decrease (as a result of contractionary monetary policy) which will decrease the demand for money (as people will need less money to buy goods and services).

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