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Figure: Short-Run Determination of the Interest Rate
-(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run the demand for money will _____, and the interest rate will_____.

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Figure: Short-Run Determination of the Interest Rate

-(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run Determination of the Interest Rate. If the money supply is at MS₁ and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r₂. In the long run the demand for money will _____, and the interest rate will_____.

Quizplus · Accepted Answer

In the long run, the demand for money will increase due to the increase in nominal income and output. This increase in demand for money will cause the interest rate to increase back to its original level at r₁.

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