<p>The graph is a little misleading. </p>

<p>Imagine the interest rates increase without $MS$ shifting to $MS1$. Here the demand for money is less than the supply, so there is a surplus. If the MS does not shift, eventually the interest rate will fall again until the shortage is no longer (we are back in equilibrium). If the Fed wants to maintain the higher interest rate, $r_1$, it also must shift $MS$ to $MS1$.</p>

CC BY-SA 3.0
2017-02-02T09:26:57.597Z
I think you meant "Here the demand for money is less than the supply, so there is a shortage....". Besides that, yours is a good explanation.
tsp216
CC BY-SA 3.0
2017-02-02T17:40:50.973Z
When Q_d < Q_s, that is a surplus. I believe I am correct.
hipHopMetropolisHastings
CC BY-SA 3.0
2017-01-31T16:13:08.817Z
2017-01-31T16:13:08.817Z
hipHopMetropolisHastings
<p>A textbook, when explaining the effects of higher interest rates, claims that:</p>

<blockquote>
  <p>The initial equilibrium is with real output at $Y_0$,the price level
  at $P_0$ and the rate of interest $r_0$. An increase in the rate of
  interest to $r_1$ will need to be balanced by a decrease in money
  supply to maintain money-market equilibrium.</p>
</blockquote>

<p>The illustration below accompanies the claim.</p>

<p><a href="https://i.sstatic.net/STkJA.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/STkJA.jpg" alt="enter image description here"></a></p>

<p>How/why does the money supply shift leftwards to accommodate a return to "money-market equilibrium", and what is such an equilibrium to begin with? </p>

<p>Additionally, is this shift automatic or is it one where the government must intervene?</p>

CC BY-SA 3.0
2017-01-31T15:44:06.513Z
It is hard to think of a change in interest rates without a corresponding change in the money supply. Supposing the Federal Reserve enacts  contractionary policy, we necessarily see the money supply fall and rates rise. Generally, you should think of one as the impetus for the other and not one as some thing that must happen to return a system to equilibrium.
123
<interest-rate><money-supply>
Elucidation needed on textbook's description of the effect of increased Interest rates on the money supply curve?
tsp216
# Elucidation needed on textbook's description of the effect of increased Interest rates on the money supply curve?

(Asked by: username_0 on 2017-01-31)

A textbook, when explaining the effects of higher interest rates, claims that:

> The initial equilibrium is with real output at $Y\_0$,the price level
> at $P\_0$ and the rate of interest $r\_0$. An increase in the rate of
> interest to $r\_1$ will need to be balanced by a decrease in money
> supply to maintain money-market equilibrium.

The illustration below accompanies the claim.

[![enter image description here](https://i.sstatic.net/STkJA.jpg)](https://i.sstatic.net/STkJA.jpg)

How/why does the money supply shift leftwards to accommodate a return to "money-market equilibrium", and what is such an equilibrium to begin with?

Additionally, is this shift automatic or is it one where the government must intervene?

**Tags:** interest-rate, money-supply

> **Comments:**
> **username_1**: It is hard to think of a change in interest rates without a corresponding change in the money supply. Supposing the Federal Reserve enacts  contractionary policy, we necessarily see the money supply fall and rates rise. Generally, you should think of one as the impetus for the other and not one as some thing that must happen to return a system to equilibrium.  

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## 1 answers

### Answer by username_2 on 2017-01-31. Score: 1 | Accepted answer

The graph is a little misleading.

Imagine the interest rates increase without $MS$ shifting to $MS1$. Here the demand for money is less than the supply, so there is a surplus. If the MS does not shift, eventually the interest rate will fall again until the shortage is no longer (we are back in equilibrium). If the Fed wants to maintain the higher interest rate, $r\_1$, it also must shift $MS$ to $MS1$.

> **Comments:**
> **username_0**: I think you meant "Here the demand for money is less than the supply, so there is a shortage....". Besides that, yours is a good explanation.  
> **username_2**: When Q_d < Q_s, that is a surplus. I believe I am correct.  

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