According to your graph, the equilibrium value of money is, therefore the equilibrium price level isNow, 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 tothe 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 isthan thequantity of money demanded at the initial equilibrium. This contraction in the money supply willpeople's demand for goods andservices. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services willandthe value of money will 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.Quantity of Money DemandedPrice Level (P)Value of Money (1/P)(Billions of dollars)0.801.51.002.01.333.52.007.0Now consider the relationship between the price level and the quantity of money that people demand. The higher the price level, themoney thetypical transaction requires, and themoney 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 blueconnected points (circle symbol) to graph the money demand curve.2.001.75MS11.501.25Money Demand1.000.75MS,0.500.25+345678QUANTITY OF MONEY (Billions of dollars)VALUE OF MONEY

Given below is the table which gives the value of money at each price level of Price level…

1dea FIll in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 0.80 1.5 1.00 2.0 1.33 3.5 2.00 7.0 Now consider the relationship between the price level and the quantity of money that people demand. The higher 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 (MS, ) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 2.00 1.75 MS, 1.50 1.25 Money Demand 1.00 0.75 MS, 0.50 025 2 QUANTITY OF MONEY (Billions of dollars) VALUE OF MONEY

1dea FIll in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 0.80 1.5 1.00 2.0 1.33 3.5 2.00 7.0 Now consider the relationship between the price level and the quantity of money that people demand. The higher 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 (MS, ) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 2.00 1.75 MS, 1.50 1.25 Money Demand 1.00 0.75 MS, 0.50 025 2 QUANTITY OF MONEY (Billions of dollars) VALUE OF MONEY

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter16: Monetary Policy

Section: Chapter Questions

Problem 2SQP

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