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) | Quantity of Money Demanded (Billions of dollars) ||-----------------|-----------------------|----------------------------------------|| 0.80 | | 2.0 || 1.00 | | 2.5 || 1.33 | | 4.0 || 2.00 | | 8.0 |Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the ____ money 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 $2.5 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.** **Monetary Policy and the Money Supply**Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 billion. **Instructions:**1. **Plotting the Initial Money Supply**: - Use the orange line (square symbol) to plot the initial money supply ($MS_1$) set by the Fed.2. **Graphing the Money Demand Curve**: - Use the blue connected points (circle symbol) to graph the money demand curve.**Graph Explanation:**- The x-axis represents the "Quantity of Money" in billions of dollars, ranging from 0 to 8.- The y-axis represents the "Value of Money" ranging from 0 to 2.00.- There are three key elements within the graph: - Orange line with a square symbol representing $MS_1$ (initial money supply). - Blue circle symbols indicating the Money Demand. - Purple line with a diamond symbol representing $MS_2$ (new money supply).**Analysis:**- 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 $2.5 billion to $4 billion.- To increase the money supply, the Fed can use open market operations to __________ the public.- Use the purple line (diamond symbol) to plot the new money supply ($MS_2$).**Impact of the Federal Reserve's Actions:**- Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is __________ than the quantity of money demanded at the initial equilibrium. - This expansion 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 __________.

Equilibrium in the money market takes place at the intersection of the money demand and money supply…

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) 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 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 $2.5 billion. mone 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.

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) 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 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 $2.5 billion. mone 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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) | Quantity of Money Demanded (Billions of dollars) |
|-----------------|-----------------------|----------------------------------------|
| 0.80 | | 2.0 |
| 1.00 | | 2.5 |
| 1.33 | | 4.0 |
| 2.00 | | 8.0 |

Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the ____ money 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 $2.5 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.**

**Monetary Policy and the Money Supply**

Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 billion.

**Instructions:**

1. **Plotting the Initial Money Supply**:
- Use the orange line (square symbol) to plot the initial money supply ($MS_1$) set by the Fed.

2. **Graphing the Money Demand Curve**:
- Use the blue connected points (circle symbol) to graph the money demand curve.

**Graph Explanation:**

- The x-axis represents the "Quantity of Money" in billions of dollars, ranging from 0 to 8.
- The y-axis represents the "Value of Money" ranging from 0 to 2.00.
- There are three key elements within the graph:
- Orange line with a square symbol representing $MS_1$ (initial money supply).
- Blue circle symbols indicating the Money Demand.
- Purple line with a diamond symbol representing $MS_2$ (new money supply).

**Analysis:**

- 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 $2.5 billion to $4 billion.

- To increase 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 ($MS_2$).

**Impact of the Federal Reserve's Actions:**

- Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is __________ than the quantity of money demanded at the initial equilibrium.

- This expansion 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 __________.

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