Using a figure similar to Figure 15A-1, explain how the money market and the loanable funds market react to a reduction in the money supply in the short run.

Contrast the short-run effects of an increase in the money supply on the interest rate to the long-run effects of an increase in the money supply on the interest rate. Which market determines the interest rate in the short run? Which market does so in the long run? What are the implications of your answers for the effectiveness of monetary policy in influencing real GDP in the short run and the long run?