Question

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 2.00 4.0 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 money the typical transaction requires, and the 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. (?) 1.25 1.00 MS 0.75 Money Demand 0.50 MS2 0.25 0 1 5 2 3 QUANTITY OF MONEY (Billions of dollars) According to your graph, the equilibrium value of money is level is ., therefore the equilibrium price . Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 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 (MS2). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is than the 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

Answer 1

Price level	Value of money
1	1
1.33	0.75
2	0.5
4	0.25

The lower the price level, The LESS money typical transaction requires and the LESS money people will wish to hold.

Reason- When price level falls, the money required will be less as transaction requires less money.

5 N Value of money 1-75 -1-5 1.25 -1 -0.75 -0.5 0.25 -1 0 1 2 3 4 5 6 7 8 9 10 Money demand -0.25

The Equilibrium value of money is 0.5 and equilibrium Price is 2.

fed can use open market operations to SELL BONDS TO THE PUBLIC.

Quantity of money supplied is LESS than the quantity of money demanded.

This contractions in money supply will Reduce peoples demand.

The price of goods and services will fall and value of money will RISE.

reason- There is inverse relationship between price and value of money.

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