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Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by m
Which tend to be more volatile, short- or long-term interest rates? O Short-term interest rates Long-term interest rates If t
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Answer #1

Regarding the graph:

It is already moved to show the happening.

Explanation: since there is contraction, money supply decreases. It shifts the supply curve to the left as S2. This S2 meets the demand curve (D) at higher point, where the corresponding equilibrium capital borrowing (in the horizontal axis) decreases to 3 million dollars and equilibrium interest rate (in the vertical axis) increases to 12%.

Regarding the volatility:

Answer: 1st option

Short-term rate is more volatile or fickle than the long-term rate. This is so because in the long-run the economy adjusts automatically – all factors of production (land, labor, capital, and organization) become variable in the long-run and there is no fixed element like in the short-run.

Regarding the real rate:

Answer: 2nd option

Real rate = Nominal rate – Inflation rate

               = 5.60% - 3.40%

               = 2.20%

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