Econ Macro (book Only)
6th Edition
ISBN: 9781337408745
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 15, Problem 5P
Sub-part
A
To determine
whether the fed would increase or decrease the money supply.
Sub-Part
B
To determine
whether the fed should buy or sell government securities in case it uses open market operations.
Sub-Part
C
To determine
whether the interest rate and the quantity of money demanded would increase, decrease or remains unchanged.
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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)
0.80
1.25
2.0
1.00
1.00
2.5
1.33
0.75
4.0
2.00
0.50
8.0
mon
Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the more
the typical transaction requires, and the more 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 $4 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.
2.00
O
1.75
MS₁
1.50
1.25
Money Demand
1.00
0.75
MS₂
0.50…
Question 13 (1 point)
Suppose the supply of money, measured by M1, is $3.0 trillion, output, measured by real GDP, is
$18.7 trillion, and the velocity of money is 7.1. Suppose the supply of money increases to $3.7
trillion but GDP and the velocity of money do not change. What is the percent by which prices
change? Provide your answer as a percentage rounded to two decimal places. Do not include
any symbols, such as "$," "," "%," or "," in your answer.
Your Answer:
Answer
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.
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