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How do changes in supply and demand affect interest rates?

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A. How do changes in supply and demand affect interest rates? B. Give an example of how fiscal and monetary policies compliment or work against each other?

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The solution discusses how changes in supply and demand affect interest rates.

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When the Fed increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded at any given price level, shifting aggregate-demand to the right.

When the Fed contracts the money supply, it raises the interest rate and reduces the quantity of goods and services demanded at any given price level, shifting aggregate-demand to the left.

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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