Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase? A) The Federal Reserve increases the money supply. B) Money demand increases. C) The price level decreases. D) All of the above are correct.

Question

Quizplus · Accepted Answer

An increase in money demand would shift the MD curve to the right. This would lead to a new equilibrium at a higher interest rate (rS2U2B11S2U2B0). An increase in money supply or a decrease in price level would shift the MS curve to the right and lead to a new equilibrium at a lower interest rate. Therefore, options A and C would not cause an increase in the equilibrium interest rate.