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2. Money supply, money demand, and adjustment to monetary equilibrium 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less 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 $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. money VALUE OF MONEY 1.25 1.00 MS₁ 0.75 Money Demand 0.50 0.25 0 + 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars) MS2 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. (?) Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This expansion in the money supply will than the 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 the value of money will and

2. Money supply, money demand, and adjustment to monetary equilibrium 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less 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 $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. money VALUE OF MONEY 1.25 1.00 MS₁ 0.75 Money Demand 0.50 0.25 0 + 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars) MS2 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. (?) Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This expansion in the money supply will than the 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 the value of money will and

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter12: Money Growth And Intlation
Section: Chapter Questions
Problem 1QR
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2. Money supply, money demand, and adjustment to monetary equilibrium 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less 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 $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. money
Transcribed Image Text:2. Money supply, money demand, and adjustment to monetary equilibrium 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less 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 $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. money
VALUE OF MONEY 1.25 1.00 MS₁ 0.75 Money Demand 0.50 0.25 0 + 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars) MS2 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. (?) Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This expansion in the money supply will than the 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 the value of money will and
Transcribed Image Text:VALUE OF MONEY 1.25 1.00 MS₁ 0.75 Money Demand 0.50 0.25 0 + 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars) MS2 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. (?) Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This expansion in the money supply will than the 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 the value of money will and
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