EBK ESSENTIALS OF ECONOMICS
7th Edition
ISBN: 8220102452107
Author: Mankiw
Publisher: CENGAGE L
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Question
Chapter 22, Problem 1QR
To determine
The level of
Expert Solution & Answer
Explanation of Solution
A rise in the price level lowers the real value of money. This is because people will have to pay more to the goods and services they buy or in other terms each dollar now buys a smaller quantity of goods and services.
Economics Concept Introduction
Concept Introduction:
Inflation: Inflation is an increase in the general price level of goods and services in an economy over a period.
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Students have asked these similar questions
According to your graph, the equilibrium value of money is
, therefore the equilibrium 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
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
than the
quantity of money demanded at the initial equilibrium. This contraction 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
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.
money
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 (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)
1.00
1.33
2.00
4.00
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.
1.25
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.
(?)
money
Chapter 22 Solutions
EBK ESSENTIALS OF ECONOMICS
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