a. If the Bank of Korea raises its Base Rate, it would mean the decrease of money supply. According to the liquidity preference theory, the interest rate adjusts to balance the supply of and demand for money. Therefore, the decrease in the money supply (MS₁ to MS₂) would lead to the increase of the equilibrium interest rate (r₁ to r₂). (Graph below) b. In the short-run, output falls from Y₁ to Y..