Fiscal Policy and the Money Market

Question

If the government contracts fiscal policy by reducing its spending, what is the expected immediate effect on the money market equilibrium illustrated above?

Accepted Answer

The money demand curve shifts left, leading to a lower equilibrium interest rate.

Answer

The money demand curve shifts right, which increases the equilibrium interest rate.

Answer

The money supply curve shifts right, causing the equilibrium interest rate to drop.

Answer

The money supply curve shifts left, causing the equilibrium interest rate to rise.