Question: Continuing from equilibrium E1 in the previous problem, now suppose that in the economy of Eastlandia the central bank decides to decrease the money supply.

Continuing from equilibrium E1 in the previous problem, now suppose that in the economy of Eastlandia the central bank decides to decrease the money supply.

a. Using the diagram in problem 5, explain what will happen to the interest rate in the short run.

b.What will happen to the interest rate in the long run?

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