2. Money supply, money demand, and adjustment to monetary equilibriumThe 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. Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the ____ (more/less) money the typical transaction requires, and the _____ (more/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 $2.5 billion.Use the orange line (square symbol) to plot the initial money supply (MS1MS1) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 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.In order to increase the money supply, the Fed can use open market operations to _____ (sell bonds to/buy bonds from) the public. Use the purple line (diamond symbol) to plot the new money supply (MS2MS2). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is ____ (greater/less) than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will ______ (increase/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 _____ (rise/fall) and the value of money will _____ (rise/fall) . The image contains a table related to economic concepts, specifically focusing on the price level, the value of money, and the quantity of money demanded. The table has three columns:1. **Price Level (P)**: This column lists different price levels.2. **Value of Money (1/P)**: This column is empty, with blue down arrows indicating that the value of money needs to be calculated for each price level.3. **Quantity of Money Demanded (Billions of dollars)**: This column shows the corresponding quantity of money demanded for each price level.The rows indicate the following data:- At a price level (P) of 0.80, the quantity of money demanded is 2.0 billion dollars.- At a price level (P) of 1.00, the quantity of money demanded is 2.5 billion dollars.- At a price level (P) of 1.33, the quantity of money demanded is 4.0 billion dollars.- At a price level (P) of 2.00, the quantity of money demanded is 8.0 billion dollars.To fill the "Value of Money (1/P)" column, you need to calculate the reciprocal of each price level. This graph illustrates the relationship between the "Quantity of Money" (in billions of dollars) and the "Value of Money." The x-axis is labeled as "QUANTITY OF MONEY (Billions of dollars)" with values ranging from 0 to 8. The y-axis is labeled as "VALUE OF MONEY" with values ranging from 0 to 2.00.The graph includes the following lines:- **MS₁ (Money Supply 1):** Represented by an orange line with square markers.- **Money Demand:** Represented by a blue line with circular markers.- **MS₂ (Money Supply 2):** Represented by a purple line with diamond markers.These lines help to illustrate various theories of money supply and demand, showing how changes in money supply, represented by MS₁ and MS₂, can impact the value of money in relation to its demand.

Equilibrium in the money is reached where quantity of money demanded is equal to quantity of money supplied.Value of money= 1/price level Lower the price level, higher is the value of money. Higher value of money can buy more of the goods. This means less money is needed to buy the goods.Equilibrium occurs at the intersection of demand and supply of money. Equilibrium price is 1 and equilibrium value of money is 1. Money supply increases when Fed buys bonds from the public. Blanks: 1,1 Buy bonds from greater, increase, rise, fall

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. Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the __ (more/less) money the typical transaction requires, and the _ (more/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 $2.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS1MS1) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 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. In order to increase the money supply, the Fed can use open market operations to _ (sell bonds to/buy bonds from) the public. Use the purple line (diamond symbol) to plot the new money supply (MS2MS2). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is (greater/less) than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will __ (increase/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 _ (rise/fall) and the value of money will ___ (rise/fall) .

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

2. Money supply, money demand, and adjustment to monetary equilibrium

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.

Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the ____ (more/less) money the typical transaction requires, and the _____ (more/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 $2.5 billion.

Use the orange line (square symbol) to plot the initial money supply (MS1MS1) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.

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.

In order to increase the money supply, the Fed can use open market operations to _____ (sell bonds to/buy bonds from) the public.

Use the purple line (diamond symbol) to plot the new money supply (MS2MS2).

Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is ____ (greater/less) than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will ______ (increase/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 _____ (rise/fall) and the value of money will _____ (rise/fall) .

The image contains a table related to economic concepts, specifically focusing on the price level, the value of money, and the quantity of money demanded. The table has three columns:

1. **Price Level (P)**: This column lists different price levels.
2. **Value of Money (1/P)**: This column is empty, with blue down arrows indicating that the value of money needs to be calculated for each price level.
3. **Quantity of Money Demanded (Billions of dollars)**: This column shows the corresponding quantity of money demanded for each price level.

The rows indicate the following data:

- At a price level (P) of 0.80, the quantity of money demanded is 2.0 billion dollars.
- At a price level (P) of 1.00, the quantity of money demanded is 2.5 billion dollars.
- At a price level (P) of 1.33, the quantity of money demanded is 4.0 billion dollars.
- At a price level (P) of 2.00, the quantity of money demanded is 8.0 billion dollars.

To fill the "Value of Money (1/P)" column, you need to calculate the reciprocal of each price level.

This graph illustrates the relationship between the "Quantity of Money" (in billions of dollars) and the "Value of Money." The x-axis is labeled as "QUANTITY OF MONEY (Billions of dollars)" with values ranging from 0 to 8. The y-axis is labeled as "VALUE OF MONEY" with values ranging from 0 to 2.00.

The graph includes the following lines:

- **MS₁ (Money Supply 1):** Represented by an orange line with square markers.
- **Money Demand:** Represented by a blue line with circular markers.
- **MS₂ (Money Supply 2):** Represented by a purple line with diamond markers.

These lines help to illustrate various theories of money supply and demand, showing how changes in money supply, represented by MS₁ and MS₂, can impact the value of money in relation to its demand.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

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.