Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 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. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. VALUE OF MONEY Use the orange line (square symbol) to plot the initial money supply (MS) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 1.25 1.00 0.75 Quantity of Money Demanded (Billions of dollars) 1.5 0.50 0.25 2.0 3.5 7.0 1 QUANTITY OF MONEY (Billions of dollars) MS Money Demand MS₂ According to your graph, the equilibrium value of money is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. therefore the equilibrium price level is In order to reduce the money supply, the Fed can use open market operations to the public. Use the purple line (diamond symbol) to plot the new money supply (MS). 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 ue of money will and the value of money
Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 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. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. VALUE OF MONEY Use the orange line (square symbol) to plot the initial money supply (MS) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 1.25 1.00 0.75 Quantity of Money Demanded (Billions of dollars) 1.5 0.50 0.25 2.0 3.5 7.0 1 QUANTITY OF MONEY (Billions of dollars) MS Money Demand MS₂ According to your graph, the equilibrium value of money is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. therefore the equilibrium price level is In order to reduce the money supply, the Fed can use open market operations to the public. Use the purple line (diamond symbol) to plot the new money supply (MS). 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 ue of money will and the value of money
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
please dont make a humungous run on paragraph of an answer/explanation I need to know what I'm reading
And answer as soon as possible
Transcribed Image Text:Price Level (P) Value of Money (1/P)
1.00
1.33
2.00
4.00
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.
VALUE OF MONEY
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 (MS) set by the Fed. Then, referring to the previous table, use the blue
connected points (circle symbol) to graph the money demand curve.
1.25
1.00
0.75
0.50
0.25
0
Quantity of Money Demanded
(Billions of dollars)
1.5
0
1
2
3
5
QUANTITY OF MONEY (Billions of dollars)
2.0
3.5
7.0
6
7
According to your graph, the equilibrium value of money is
8
MS₁
Money Demand
MS₂
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.
Use the purple line (diamond symbol) to plot the new money supply (MS).
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
money
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 4 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.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