Under sticky prices
A) a fall in the money supply raises the interest rate to preserve money market equilibrium.
B) a fall in the money supply reduces the interest rate to preserve money market equilibrium.
C) a fall in the money supply keeps the interest rate intact to preserve money market equilibrium.
D) a fall in the money supply does not affect the interest rate in the short run, only in the long run.
E) a fall in the money supply raises the interest rate to preserve money market equilibrium in the long run.

Question

Quizplus · Accepted Answer

Under sticky prices, a fall in the money supply raises the interest rate to preserve money market equilibrium. This happens because sticky prices result in a slower adjustment of prices and wages to changes in the money supply, and therefore a reduction in the money supply leads to a temporary excess demand for money, which raises the interest rate until the demand for money equals the reduced supply.

Under Sticky Prices