2. Money supply, money demand, and adjustment to monetary equilibrium The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. money VALUE OF MONEY 1.25 1.00 MS₁ 0.75 Money Demand 0.50 0.25 0 + 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars) MS2 According to your graph, the equilibrium value of money is therefore the equilibrium price level is Now, suppose that the Fed increases the money supply from the initial level of $3.5 billion to $7 billion. In order to increase the money supply, the Fed can use open market operations to Use the purple line (diamond symbol) to plot the new money supply (MS2). the public. (?) Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This expansion in the money supply will than the people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will the value of money will and
2. Money supply, money demand, and adjustment to monetary equilibrium The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. money VALUE OF MONEY 1.25 1.00 MS₁ 0.75 Money Demand 0.50 0.25 0 + 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars) MS2 According to your graph, the equilibrium value of money is therefore the equilibrium price level is Now, suppose that the Fed increases the money supply from the initial level of $3.5 billion to $7 billion. In order to increase the money supply, the Fed can use open market operations to Use the purple line (diamond symbol) to plot the new money supply (MS2). the public. (?) Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This expansion in the money supply will than the people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will the value of money will and
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:2. Money supply, money demand, and adjustment to monetary equilibrium
The following table gives the quantity of money demanded at various price levels (P), the money demand schedule.
In the following table, fill in the column labeled Value of Money.
Quantity of Money Demanded
Price Level (P)
Value of Money (1/P)
(Billions of dollars)
1.00
1.00
1.33
0.75
2.00
0.50
4.00
0.25
1.5
2.0
3.5
7.0
Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less
required to complete transactions, and the less money people will want to hold in the form of currency or demand deposits.
Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion.
Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue
connected points (circle symbol) to graph the money demand curve.
money
Transcribed Image Text:VALUE OF MONEY
1.25
1.00
MS₁
0.75
Money Demand
0.50
0.25
0
+
0
1
2
3
4
5
6
7
8
QUANTITY OF MONEY (Billions of dollars)
MS2
According to your graph, the equilibrium value of money is
therefore the equilibrium price level is
Now, suppose that the Fed increases the money supply from the initial level of $3.5 billion to $7 billion.
In order to increase the money supply, the Fed can use open market operations to
Use the purple line (diamond symbol) to plot the new money supply (MS2).
the public.
(?)
Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is
quantity of money demanded at the initial equilibrium. This expansion in the money supply will
than the
people's demand for goods and
services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will
the value of money will
and
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education