According to your graph, the equilibrium value of money is Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to therefore the equilibrium price level is the public. Use the purple line (diamond symbol) to plot the new money supply (MS₂). than the 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 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
According to your graph, the equilibrium value of money is Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to therefore the equilibrium price level is the public. Use the purple line (diamond symbol) to plot the new money supply (MS₂). than the 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 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
Chapter26: Monetary Policy
Section: Chapter Questions
Problem 4SQP
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Transcribed Image Text: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 higher 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.
VALUE OF MONEY
2.00
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.
1.79
1.50
1.25
1.00
0.50
Quantity of Money Demanded
(Billions of dollars)
2.0
D
D
1
2.5
4.0
8.0
2
4
5
QUANTITY OF MONEY (Billions of dollars)
According to your graph, the equilibrium value of money is
MS,
Money Demand
therefore the equilibrium price level is
Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion.
In order to increase the money supply, the Fed can use open market operations to
money
the public.
Use the purple line (diamond symbol) to plot the new money supply (MS₂).
than the
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
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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