Let’s see whether the Keynesian conclusions hold under two different scenarios. We still assume that (1) Prices were sticky, (2) Money market always clear. Now, instead of assuming that output is demand determined we use the assumption that OUTPUT IS ALWAYS SUPPLY DETERMINED (in other words, if Y d is different from Y s, then Y = Y s.) 1. Under this new set up, starting from a classical equilibrium, what is the effect on the interest rate and on output of a DECREASE in money supply?

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