The diagram illustrates how the rate of interest is determined in an economy in which MS stands for the money supply and LP stands for liquidity preference. The rate of interest increases because the liquidity preference curve moves from LP1 to LP2. Which policy could be adopted in an attempt to keep the rate at r1?
- Aincreased government expenditure
- Bincreases in indirect taxes
- Creductions in income tax rates
- Dthe purchase of bonds in the open market