Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 16-2. Assume the money market is always in equilibrium. Under the assumptions of the model, A) the quantity of goods and services demanded is higher at P₂ than it is at P₁. B) the quantity of money is higher at Y₁ than it is at Y₂. C) an increase in r from r₁ to r₂ is associated with a decrease in Y from Y₁ to Y₂. D) All of the above are correct.

Question

Quizplus · Accepted Answer

An increase in interest rates (r) leads to a decrease in aggregate demand (Y) as shown in the right-hand graph. Therefore, an increase in r from r₁ to r₂ is associated with a decrease in Y from Y₁ to Y₂. The other choices are not necessarily true under the assumptions of the model.