The rise in prices increases the demand for money. At the initial interest rate i0, the increase in prices will create an excess demand for money in markets. Economic agents will want to hold more money because of increasing prices. Since we assumed that money supply is constant, money market can only reach an equilibrium at a higher interest rate. Because of increased interest rate in money market, financing cost of investment will increase and this makes some investment projects already planned unprofitable at new high interest rate. It is obvious that this situation implies a decrease in planned investment expenditures. The decrease in planned investment expenditures in the case of an increase in interest rates means that aggregate expenditures also decrease. In this case, production falls.