Question 1 The diagram below describes the money demand (MD) and money supply (MS) in the context of Classical Quantity Theory of Money. Assume money supply is determined by the central bank which sets it at a fixed amount (M1) initially. Value of Money, 1P MS M Quantity of Money (1) In the above diagram, a. label the vertical axis on the right, b. add a money demand curve, and c. label the equilibrium values. (3 marks) ) Suppose now the central bank conducts an open market purchase of government bonds from the banking system. Show the effects of this open market purchase in the above diagram. Determine the changes of the equilibrium value of money and price level. Circle the correct answers below. (4 marks) Equilibrium value of money will increase / decrease / not change. Equilibrium price level will increase / decrease / not change