Interest rate MS, MS? 1 3 4 5 6 MD, MD 3 MD Money Figure 2: A model showing the money market, which determines the equilibrium interest rate on savings, as according to Keynes's theory of liquidity preferenceLet's now consider the graphs in tandem. Suppose that the economy is at short-run equilibrium 2 on Figure 1. The current state of the Money Market is point 5 on Figure 2. At this point, the economy is in a(n) [inflationary, recessionary] Federal gap. The gap could be closed if the Reserve [increased, decreased] the money supply, thereby [increasing, decreasing] the interest rate, and [increasing, decreasing] investment