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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Question

The following table shows a money demand schedule, which is the quantity of money demanded at various price levels ( P ).
Fill in the Value of Money column in the following table.
Price Level (P) Value of Money (1/P) Quantity of Money Demanded (Billions of dollars)
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 money the typical transaction requires, and the 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.

Use the orange line (square symbol) to plot the initial money supply (MS) set by the Fed. Then, referring to the previous table, use the blue
connected points (dirde symbol) to graph the money demand curve.
1.25
MS,
1.00
0.75
Money Demand
0.50
025
QUANTITY OF MONEY (Blions of dollars)
According to your graph, the equilbrium value of money is therefore the equlibrium price level is
Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion.
In order to reduce the money supply, the Fed can use open market operations to
v the public.
Use the purple line (diamond symbol) to plot the new money supply (MS).
VALUE OF MONEY

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