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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 MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. In the long run prices will _____ the demand for money.

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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 MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. In the long run prices will _____ the demand for money.

Quizplus · Accepted Answer

In the long run, prices will decrease due to the contractionary monetary policy reducing aggregate demand. As prices decrease, the demand for money will also decrease.

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