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-(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate.If the money supply is at MS₂ and the Bank of Canada conducts contractionary monetary policy,in the short run the interest rate increases to i₁.In the long run,prices will _____,thereby _________ the demand for money.

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-(Figure: Short-Run Determination of the Interest Rate) Refer to Figure: Short-Run Determination of the Interest Rate.If the money supply is at MS₂ and the Bank of Canada conducts contractionary monetary policy,in the short run the interest rate increases to i₁.In the long run,prices will _____,thereby _________ the demand for money.

Quizplus · Accepted Answer

In the short run, contractionary monetary policy reduces the money supply, which increases the interest rate. In the long run, the higher interest rate reduces aggregate demand, which leads to lower prices. Lower prices increase the real money supply, which decreases the demand for money.

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