THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 136

104 PA R T I I Financial Markets Interest Rate, i Ms i2 i1 M d1 M d2 M Quantity of Money, M F I G U R E - 10 Response to a Change in Income or the Price Level In a business cycle expansion, when income is rising, or when the price level rises, the demand curve shifts from M d1 to M d2 The supply curve is fixed at M s * M The equilibrium interest rate rises from i1 to i2 Interest Rate, i M 1s i1 i2 M s2 Md Quantity of Money, M F I G U R E - 11 Response to a Change in the Money Supply When the money supply increases, the supply curve shifts from M 1s to M 2s, and the equilibrium interest rate falls from i1 to i2