Question

Exhibit 1 Value of Money MS1 MS2 1/P 1/P2 MD Quantity of Money 13. Use Exhibit 1. If the money supply is MS1 and 1/P2 is the value of money, then (x) the money market is not in equilibrium (y) value of money is less than its equilibrium (z) the price level is more than its equilibrium level A. (x), (y) and (2) B. (x) and (y) only C. (x) and (z) only D. (y) and (z) only E. (y) only 14. Use Exhibit 1. Suppose the Federal Reserve implements a monetary policy whereby the Fed purchases bonds. As a result, A. this policy creates an excess demand for money. B. this policy eventually causes the price level to fall from 1/P1 to 1/P2 C. the money supply increases and it is represented on the graph by moving from MS1 to MS2 D. A and B, only E. B and C, only 15. Use Exhibit 1. When the money supply curve shifts from MS1 to MS2 A. the demand for goods and services decreases. B. the economy's ability to produce goods and services increases. C. the equilibrium price level decreases. D. All of the above E. None of the above is correct.

Answer 1

13 - Option B

X and Y only

This is because the equilibrium will be established at MS1 and 1/P1. So 1/P2 is underpriced .

Z shows that price level is more than equlibrium which is wrong. It is less than equlibrium.

14 - Option C

The money supply increases and it is shown in the graph as movement from MS 1 to MS2.

This will not affect the demand primarily , the price level will be raised and not reduced. Thus only option C is correct.

15 - Option C

The equlibrium price level decreases.

It moves from 1 /P1 to 1 /P2.

The demand for goods and sevices will increase and not Decrease.