The two graphs below depict the loanable funds and liquidity preference models.

Question

The two graphs below depict the loanable funds and liquidity preference models. First, identify the model by labeling the horizontal axis on each graph. Then adjust each graph to illustrate what happens in the short run if the money supply decreases.

The two graphs below depict the loanable funds and liquidity preference models. First, identify the model by labeling the horizontal axis on each graph. Then adjust each graph to illustrate what happens in the short run if the money supply decreases. MS MD Quantity of Loanable Funds Quantity of Money

Explanation / Answer

1. Figure a. that has constant money supply has quanitity of money on the horizontal axis

Figure b has quantity of loanable funds on the horizontal axis.

2. Decrease in money supply will shift the money supply curve in, raising the interest rate.

AND supply of loanable funds decreases with decrease in money supply, raising the interest rate.

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