ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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**Educational Website Text on Money Supply and Equilibrium**

According to your graph, the equilibrium value of money is [blank], therefore the equilibrium price level is [blank].

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 [blank] the public.

*Use the purple line (diamond symbol) to plot the new money supply (MS\_2).*

Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is [blank] than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will [blank] 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 [blank] and the value of money will [blank].
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Transcribed Image Text:**Educational Website Text on Money Supply and Equilibrium** According to your graph, the equilibrium value of money is [blank], therefore the equilibrium price level is [blank]. 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 [blank] the public. *Use the purple line (diamond symbol) to plot the new money supply (MS\_2).* Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is [blank] than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will [blank] 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 [blank] and the value of money will [blank].
The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P).

| Price Level (P) | Value of Money (1/P) | Quantity of Money Demanded (Billions of dollars) |
|----------------|--------------------|-----------------------------------------|
| 0.80           |                    | 1.5                                     |
| 1.00           |                    | 2.0                                     |
| 1.33           |                    | 3.5                                     |
| 2.00           |                    | 7.0                                     |

Fill in the Value of Money column in the following table.

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 (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.

**Graph Explanation:**

The graph has the following features:
- **X-axis:** Quantity of Money (Billions of dollars), ranging from 0 to 8.
- **Y-axis:** Value of Money, ranging from 0 to 2.0.
- **Orange line (square symbol):** Represents the initial money supply (MS₁) set at $3.5 billion.
- **Blue connected points (circle symbol):** Represent the money demand curve. 
- **Labelled Series:**
  - **MS₁:** Initial money supply.
  - **Money Demand**
  - **MS₂**: Additional supply (not plotted in this context).

This setup allows for visual analysis of the intersection between money supply and demand, influencing equilibrium in the money market.
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Transcribed Image Text:The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). | Price Level (P) | Value of Money (1/P) | Quantity of Money Demanded (Billions of dollars) | |----------------|--------------------|-----------------------------------------| | 0.80 | | 1.5 | | 1.00 | | 2.0 | | 1.33 | | 3.5 | | 2.00 | | 7.0 | Fill in the Value of Money column in the following table. 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 (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. **Graph Explanation:** The graph has the following features: - **X-axis:** Quantity of Money (Billions of dollars), ranging from 0 to 8. - **Y-axis:** Value of Money, ranging from 0 to 2.0. - **Orange line (square symbol):** Represents the initial money supply (MS₁) set at $3.5 billion. - **Blue connected points (circle symbol):** Represent the money demand curve. - **Labelled Series:** - **MS₁:** Initial money supply. - **Money Demand** - **MS₂**: Additional supply (not plotted in this context). This setup allows for visual analysis of the intersection between money supply and demand, influencing equilibrium in the money market.
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