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Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 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 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. 1.25 1.00 0.75 Quantity of Money Demanded (Billions of dollars) 1.5 0.50 0.25 2.0 3.5 7.0 1 QUANTITY OF MONEY (Billions of dollars) MS Money Demand MS₂ According to your graph, the equilibrium value of money is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. therefore the equilibrium price level is In order to reduce 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). 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 contraction 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 ue of money will and the value of money

Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 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 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. 1.25 1.00 0.75 Quantity of Money Demanded (Billions of dollars) 1.5 0.50 0.25 2.0 3.5 7.0 1 QUANTITY OF MONEY (Billions of dollars) MS Money Demand MS₂ According to your graph, the equilibrium value of money is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. therefore the equilibrium price level is In order to reduce 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). 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 contraction 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 ue of money will and the value of money

Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Monetary System
Section: Chapter Questions
Problem 12PA
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Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 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. VALUE OF MONEY Assume that the Federal Reserve 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. 1.25 1.00 0.75 0.50 0.25 0 Quantity of Money Demanded (Billions of dollars) 1.5 0 1 2 3 5 QUANTITY OF MONEY (Billions of dollars) 2.0 3.5 7.0 6 7 According to your graph, the equilibrium value of money is 8 MS₁ Money Demand MS₂ therefore the equilibrium price level is 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 the public. Use the purple line (diamond symbol) to plot the new money supply (MS). 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 contraction 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 and the value of money will money
Transcribed Image Text:Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 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. VALUE OF MONEY Assume that the Federal Reserve 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. 1.25 1.00 0.75 0.50 0.25 0 Quantity of Money Demanded (Billions of dollars) 1.5 0 1 2 3 5 QUANTITY OF MONEY (Billions of dollars) 2.0 3.5 7.0 6 7 According to your graph, the equilibrium value of money is 8 MS₁ Money Demand MS₂ therefore the equilibrium price level is 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 the public. Use the purple line (diamond symbol) to plot the new money supply (MS). 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 contraction 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 and the value of money will money
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