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

Quizplus · Accepted Answer

In the long run, prices and wages adjust, reducing the demand for money, and the interest rate returns to its original level, r₂.

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