Decrease in the money supply shifts the money supply curve

Reference no: EM131070960

When the Fed sells bonds to the public, it increases the supply of bonds, thus shifting the supply curve B s to the right. The result is that the intersection of the supply and demand curves B s and B d occurs at a lower price and a higher equilibrium interest rate, and the interest rate rises. With the liquidity preference framework, the decrease in the money supply shifts the money supply curve M s to the left, and the equilibrium interest rate rises. The answer from bond supply and demand analysis is consistent with the answer from the liquidity preference framework.

Reference no: EM131070960

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