Question: Using a figure similar to Figure 15A-1, explain how the money market and the loanable funds market react to a reduction in the money supply

Using a figure similar to Figure 15A-1, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.

Figure 15A-1.

(a) The Liquidity Preference Model of the Interest Rate (b) The Loanable Funds Model of the Interest Rate Interest rate,

(a) The Liquidity Preference Model of the Interest Rate (b) The Loanable Funds Model of the Interest Rate Interest rate, i Interest rate, i In the short run, an increase in the MS2 money supply reduces MS, the interest rate... .. which leads to a short-run increase in real GDP and an increase in the supply of loanable funds. E2 E2 MD Quantity of money Quantity of loanable funds

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