2. Money supply, money demand, and adjustment to monetary equilibrium The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.33 2.00 4.00 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. money Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. more less money 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. Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. more Assume that the Federal Reserve initially fix less quantity of money supplied at $3.5 billion. money 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. 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. VALUE OF MONEY 1.25 1.00 MS 0.75 Money Demand 0.50 0.25 0 0 1 2 3 4 5 6 QUANTITY OF MONEY (Billions of dollars) 7 8 MS2 According to your graph, the equilibrium value of money is therefore the equilibrium price level is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. In order to reduce the money supply, the Fed can use open market operations to Use the purple line (diamond symbol) to plot the new money supply (MS2). the public. than the people's demand for goods and and Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This contraction in the money supply will 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 the value of money will According to your graph, the equilibrium value of money is Now, suppose that the Fed reduces the money supply from In order to reduce the money supply, the Fed can use open Use the purple line (diamond symbol) to plot the new mone therefore the equilibrium price level is 0.25 al level of $3.5 billion to $2 billion. 0.50 operations to 0.75 1.00 y (MS2). the public. According to your graph, the equilibrium value of money is therefore the equilibrium price level is 1.00 Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. 1.33 In order to reduce the money supply, the Fed can use open market operations to ic. 2.00 Use the purple line (diamond symbol) to plot the new money supply (MS2). Immediately after the Fed changes the supply from its initial equilibrium lovel the quantity of 4.00 than the According to your graph, the equilibrium value of money is , therefore the equilibrium price level is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 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). sell bonds to buy bonds from than people's demand for goods Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This contraction in the money supply will 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 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 quantity of money demanded at the initial equilibrium. This contraction in the money supply will services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods the value of money will than the people's r goods and greater ces will less and In order to reduce the money supply, the Fed can use open market operations to Use the purple line (diamond symbol) to plot the new money supply (MS2). the public. increase reduce Immediately after the Fed changes the money supply from its initial equilibrium level, the quanti quantity of money demanded at the initial equilibrium. This contraction in the money supply will 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 the value of money will supplied is than the people's demand for goods and and Use the purple line (diamond symbol) to plot the new money supply (MS2). rise Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This contraction in the money supply will 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 the value of money will thar fall people's demand for goods and Use the purple line (diamond symbol) to plot the new money supply (MS2). fall Immediately after the F rise ges the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money dema the initial equilibrium. This contraction in the money supply will services. In the long rur the value of money will than the people's demand for goods and the economy's ability to produce goods and services has not changed, the prices of goods and services will and