Figure 21-4. On the figure, MS represents money supply and MD represents money demand.
-Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₃. Let Y₃ represent the corresponding quantity of goods and services demanded, and let P₃ represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P₃, then

Question

Figure 21-4. On the figure, MS represents money supply and MD represents money demand.

-Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₃. Let Y₃ represent the corresponding quantity of goods and services demanded, and let P₃ represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P₃, then

Quizplus · Accepted Answer

A decrease in the money supply typically leads to higher interest rates, making borrowing more expensive. As a result, fewer firms will choose to borrow to build new factories and buy new equipment.