2. Money supply, money demand, and adjustment to monetary equilibrium 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 Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 2.0 1.33 2.5 4.0 2.00 4.00 8.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, and the y money people will wish to hold in the form currency or demand deposits.

QUESTION 3 When a customer takes cash from a drawer in his home and deposits it into his saving account, the composition of the money supply will change immediately and the size of the money supply may eventually change. Illustrate and explain the process by which this action may change the money supply in economy. ***END OF QUESTION PAPER*** States) E Accessibility: Investigate

#27 You saved $900 in currency in your piggy bank to purchase a new iPhone. The $900 you kept in your piggy bank illustrates money’s function as a _______. The iPhone’s price is posted as $900. The $900 price illustrates money’s function as a _____. You use the $900 to purchase the iPhone. This transaction illustrates money’s function as a ______.   a medium of exchange, unit of account, store of value b medium of exchange, store of value, unit of account c store of value, medium of exchange, unit of account d store of value, unit of account, medium of exchange

(Figure: A Money Market) The accompanying figure Equilibrium in the Money Market shows the money market in equilibrium at an interest rate of r2. Holding the money supply constant, which of the following might cause the interest rate in the market to decrease to r1?     A) The inflation rate falls to historically low levels.   B) Higher payroll taxes cause employers to pay workers cash under the table.   C) There is a significant increase in the stock market.   D) A recession decreases real GDP.

Suppose there is an increase in money supply, as a result interest rates will Multiple Choice rise and the quantity of money will increases. fall and the quantity of money will remain constant. rise and the quantity of money will decrease. fall and the quantity of money will increases.

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Am.101.

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3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 6 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand + 0.1 Money Supply 0.3 0.5 0.6 MONEY (Trillions of dollars) 0.2 0.7 0.8 New MS Curve New Equilibrium ? Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing…

How does an increase in price level affect the money market?   a. Money demand increases b. Money supply decreases c. Money demand decreases d. Money supply increases