A decrease in the money supply can lead to a long-run decrease in the equilibrium interest rate if the price level effect dominates the output effect.

Question

Quizplus · Accepted Answer

A decrease in the money supply typically leads to an increase in the equilibrium interest rate in the long run, as the reduced money supply increases the demand for money relative to its supply, pushing interest rates up. The price level and output effects influence short-term fluctuations but do not reverse this fundamental relationship.

A Decrease in the Money Supply Can Lead to a Long-Run