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

Question

Quizplus · Accepted Answer

The price level effect explains how a decrease in the money supply initially increases interest rates due to reduced liquidity but leads to a long-run decrease in interest rates as the lower money supply reduces the price level (deflation), increasing the real value of money and thus lowering interest rates.

A Decrease in the Money Supply Leads to an Initial