In the fourth quarter of year 2004, real GDP of the country grew at

annual rate of over 7 percent. Next year (2005), the economy continued to expand at the modest rate (Y rose at the rate of 4 percent and P increased at rate of 3 percent). At the beginning of 2005, the prime interest rate (interest rate that bank offers to best least risky customers) remained at 6 percent. By the beginning of 2006, the prime rate increased to 8.5 percent.

1. Assuming no change in money supply, show diagrammatically the effects of increase in Y and P on interest rates

2. Show separately how interest rates under what condition can continue to rise even if central bank decides to increase the money supply.