A decrease in the money supply leads to a long-run increase in the equilibrium interest rate if the _____ effect dominates other effects.

Question

Quizplus · Accepted Answer

The price level effect suggests that a decrease in the money supply will lead to lower prices (deflation), which increases the real value of money holdings. This can increase demand for goods and services, potentially raising interest rates in the long run if this effect dominates other effects like liquidity preference or changes in investment demand.

A Decrease in the Money Supply Leads to a Long-Run