Question

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. Price Level (P) Value of Money (1/P) Quantity of Money Demanded (Billions of dollars) 1.5 0.80 0.40 1.00 1.00 2.0 1.33 1.33 3.5 2.00 0.50 7.0 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 more money people wish to hold in the form of currency or demand deposits. 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 (MS) 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 1.75 MS 1.50 O 1.25 Money Demand VALUE OF MONEY 1.00 0.75 MS2

Answer 1

Table

P	1/P	Qd
.8	1.25	1.5
1	1	2
1.33	.75	3.5
2	.5	7

1) lower price, less money is needed

2) less money people will hold as cash

graph

2.00 1.75 MS, 1.50 1.25 Money Demand VALUE OF MONEY 1.00 0.75 MS₂ 0.50 0.25 0 0 1 8 2 3 4 5 6 7 QUANTITY OF MONEY (Billions of dollars)

At eqm, Md = Ms = 3.5

So • eqm value = .75

​​​​​​

• eqm price 1.33

.

Blanks

1) buy bonds from.

2) Quantity of money supplied is greater more than

3) Increase demand

4) prices will rise

5) value will  fall