Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 21-2. Assume the money market is always in equilibrium. Under the assumptions of the model, A)the real interest rate is higher at Y₂ than it is at Y₁. B)the quantity of money is the same at Y₁ as it is at Y₂. C)the price level is higher at r₂ than it is at r₁. D)All of the above are correct.

Question

Quizplus · Accepted Answer

The real interest rate is higher at Y2 than it is at Y1 because the demand for money is higher at Y2 than it is at Y1. The quantity of money is the same at Y1 as it is at Y2 because the money market is always in equilibrium. The price level is higher at r2 than it is at r1 because the real interest rate is higher at r2 than it is at r1.