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. VALUE OF MONEY 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0 0 1 2 3 4 5 6 QUANTITY OF MONEY (Billions of dollars) 7 8 T O MS₁ - Money Demand O- Use the purple line (diamond symbol) to plot the new money supply (MS2). MS2 According to your graph, the equilibrium value of money is therefore the equilibrium price level is (?) Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. In order to reduce the money supply, the Fed can use open market operations to the public. + than the 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 contraction in the money supply will 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 and the value of money will
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. VALUE OF MONEY 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0 0 1 2 3 4 5 6 QUANTITY OF MONEY (Billions of dollars) 7 8 T O MS₁ - Money Demand O- Use the purple line (diamond symbol) to plot the new money supply (MS2). MS2 According to your graph, the equilibrium value of money is therefore the equilibrium price level is (?) Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. In order to reduce the money supply, the Fed can use open market operations to the public. + than the 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 contraction in the money supply will 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 and the value of money will
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Please answer everything in photos.
Transcribed Image Text: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.
VALUE OF MONEY
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0
0
1
2
3
4
5
6
QUANTITY OF MONEY (Billions of dollars)
7
8
0
MS₁
O-
Money Demand
-
Use the purple line (diamond symbol) to plot the new money supply (MS2).
MS₂
According to your graph, the equilibrium value of money is, therefore the equilibrium price level is
(?)
Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion.
In order to reduce the money supply, the Fed can use open market operations to
the public.
+
than the
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 contraction in the money supply will
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 and
the value of money will
Transcribed Image Text: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.
Price Level (P) Value of Money (1/P)
0.80
1.00
1.33
2.00
Quantity of Money Demanded
(Billions of dollars)
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
required to complete transactions, and the money people will want to hold in the form of currency or demand deposits.
money
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