In the economy of Eastlandia, the money market is initially in equilibrium when the economy begins to slide into a recession.

a. Using the accompanying diagram, explain what will happen to the interest rate if the central bank of Eastlandia keeps the money supply constant at M₁.

b. If the central bank is instead committed to maintaining an interest rate target of r₁, then as the economy slides into recession, how should the central bank react? Using your diagram from part a, demonstrate the central bank's reaction.

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Interest MS1 rate, r E1 MD1 Quantity of money M.