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 (Billions of dollars) Price Level (P) Value of Money (1/P) 0.80 1.25 1.00 1.00 1.33 0.75 2.00 0.50 2.0 2.5 4.0 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less money 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 $4 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. 2.00 1.75 1.50 0.75 0.50 0.25 ཱ་ཎྜ་ཉ་མ་༅་གླུ་སྒྲ་སྐྱ VALUE OF MONEY 1.25 Money Demand ° 1 2 3 4 5 B 7 QUANTITY OF MONEY (Billions of dollars) *4/454 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 $4 billion to $2.5 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 (MS2). 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 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
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 (Billions of dollars) Price Level (P) Value of Money (1/P) 0.80 1.25 1.00 1.00 1.33 0.75 2.00 0.50 2.0 2.5 4.0 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less money 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 $4 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. 2.00 1.75 1.50 0.75 0.50 0.25 ཱ་ཎྜ་ཉ་མ་༅་གླུ་སྒྲ་སྐྱ VALUE OF MONEY 1.25 Money Demand ° 1 2 3 4 5 B 7 QUANTITY OF MONEY (Billions of dollars) *4/454 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 $4 billion to $2.5 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 (MS2). 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 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
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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.
Quantity of Money Demanded
(Billions of dollars)
Price Level (P) Value of Money (1/P)
0.80
1.25
1.00
1.00
1.33
0.75
2.00
0.50
2.0
2.5
4.0
8.0
Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less money
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 $4 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.
2.00
1.75
1.50
0.75
0.50
0.25
ཱ་ཎྜ་ཉ་མ་༅་གླུ་སྒྲ་སྐྱ
VALUE OF MONEY
1.25
Money Demand
°
1
2
3
4
5
B
7
QUANTITY OF MONEY (Billions of dollars)
*4/454
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 $4 billion to $2.5 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 (MS2).
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
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
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