Use the Following to Answer Questions

Use the following to answer questions:
Figure: Short-Run Determination of the Interest Rate
-(Figure: Short-Run Determination of the Interest Rate) Look at the figure Short-Run Determination of the Interest Rate. If the money supply is at MS₂ and the Fed conducts contractionary monetary policy, in the short run the interest rate increases to r₁. In the long run: the demand for money will _____, and the interest rate will_____.

A) increase; increase to r₁
B) increase; remain at r₂.
C) decrease; decrease to r₂.
D) decrease; remain at r₁.

Correct Answer:

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