MindTap-Cengage Learning Google Chrome a Secure https/ng.cengage.com/static/nb/u
ID: 1167000 • Letter: M
Question
MindTap-Cengage Learning Google Chrome a Secure https/ng.cengage.com/static/nb/u/evo/index.htmideploymentid45746101810004149 10263309048lelSBN-97813376220428id-319490 MINDTAP Frum Cengage HW.A:17.1: Chapter 17-Aplia Homework Back to Assignment Attempts: Average:f6 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 (Billions of dollars) 1.5 2.0 3.5 7.0 Price Level (P) Value of Money (1/P) 1.00 0.75 0.50 0.25 1.33 4.00 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the less money the typical transaction requires, and the less money people will wish to hold in the form of currency or demand deposít 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. 129 MS Money Demand PS Homi SonicMaster Bang & Olufsen 1Explanation / Answer
(i) According to your graph, Equilibrium value of money (according to the intersection of MS1 and MD curves where MS1 = MD = $3.5 billion) is 0.5, therefore equilibrium price level is 2.
(ii) To increase money supply, Fed can use open market operations to purchase government securities from public.
After money supply increases to $7 billion and MS1 curve shifts right to MS2 as shown in graph,
(iii) At initial value of money and price level, quantity of money supplied is now more than the quantity of money demanded. This expansion will increase people's demand for goods and services. In long run, price of goods and services will rise & value of money will fall.