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    the equilibrium interest rate

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    Using a figure similar to Figure 14-11, explain how the money market and the loanable funds market react to a reduction in the supply in the short-run.

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    © BrainMass Inc. brainmass.com December 24, 2021, 7:16 pm ad1c9bdddf
    https://brainmass.com/economics/general-equilibrium/equilibrium-interest-rate-176278

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    In the attached diagram, both the money market and the loanable funds market are initially in equilibrium at the same rate of interest, r1. A decrease in the money supply shifts the money supply curve leftward to MS2 and the equilibrium interest rate rises to r2. The increase in the interest rate leads to a decrease in real GDP, which generates a decrease in savings through the multiplier process. This decrease in savings shifts the supply curve for loanable funds leftward to S2.

    Consequently, the equilibrium interest rate in the loanable funds market rises. The new equilibrium interest rate in the loanable funds market equals the rate in the money market because savings fall by exactly enough to match the fall in investment
    spending.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 7:16 pm ad1c9bdddf>
    https://brainmass.com/economics/general-equilibrium/equilibrium-interest-rate-176278

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