Answered: The following table shows a money…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (PP).

Fill in the Value of Money column in the following table.

Price Level (P)	Value of Money (1/P)	Quantity of Money Demanded
1.00		1.5
1.33		2.0
2.00		3.5
4.00		7.0

Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the (a. more, b. less) money the typical transaction requires, and the (a. more, b. less) money people will wish to hold in the form of currency or demand deposits.

Assume that the Fed 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.

(Graph in image)

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 (a. sell bonds to, b. buy bonds from) 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 (a. greater, b. less) than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will (a. increase, b. reduce) 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 (a. rise, b. fall) and the value of money will (a. rise, b. fall)

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.
than the
Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is
people's demand for goods and
quantity of money demanded at the initial equilibrium. This expansion in the money supply will
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

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
1.25
1.00
0.75
0.50
0.25
0
0
2
3 4 5
6
QUANTITY OF MONEY (Billions of dollars)
1
7
8
MS₁
O
Money Demand
MS₂
(?)

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