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) 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 money required to complete transactions, and the money people will want to hold in the form of currency or demand deposits.
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) 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 money required to complete transactions, and the money people will want to hold in the form of currency or demand deposits.
Chapter16: Monetary Policy
Section: Chapter Questions
Problem 1SQP
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Transcribed Image Text: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
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 $3.5 billion.
VALUE OF MONEY
8
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
1.50
1.25
1.00
0.75
Quantity of Money Demanded
(Billions of dollars)
1.5
2.0
3.5
0.50
025
0
7.0
3
QUANTITY OF MONEY (Billions of dollars)
7
101
MS,
Money Demand
M
money
?
Transcribed Image Text:200
VALUE OF MONEY
1.75
1.50
1.25
1.00
0.75
0.50
621
0
1
une money demand curve.
2
3
QUANTITY OF MONEY (Bons of dollars)
MS
Money Demand
MS₂
. therefore the equilibrium price level is
According to your graph, the equilibrium value of money is
Now, suppose that the Fed increases the money supply from the initial level of $3.5 billion to $7 bilion.
In order to increase 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 (MS).
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 and
the value of money will
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