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 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) .
Chapter14: Money And The Federal Reserve System
Section: Chapter Questions
Problem 1SQP
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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) .
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