Question 7

7. Identifying costs of inflation Christopher manages a grocery store in a country experiencing a high rate of inflation. He is paid in cash twice per month. On payday, he immediately goes out and buys all the goods he will need over the next two weeks in order to prevent the money in his wallet from losing value. What he can't spend, he converts into a more stable foreign currency for a steep fee. This is an example of the of inflation. Grade It Now Save & Continue4. Velocity and the quantity equation Consider a simple economy that produces only jean jackets. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2020, the money supply was $400, the price of a jean jacket was $12.50, and the economy produced 800 jean jackets. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP Year (Dollars) Velocity of Money (Dollars) (Jean jackets) (Dollars) 2020 400 12.50 800 2021 416 25 800 The money supply grew at a rate of from 2020 to 2021. Since jean jacket output did not change from 2020 to 2021 and the velocity of money , the change in the money supply was reflected "in changes in the price level. The inflation rate from 2020 to 2021 was Grade It Now Save & Continue2. 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) 0.80 1.5 1.00 2.0 1.33 -3.5 2.00 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the money 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. 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 -0 1.75 MS 1.50 O 1.25 Money Demand 1.00 VALUE OF MONEY 0.75 MS, 0.50 - 0.25 8 QUANTITY OF MONEY (Billions of dollars) 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). 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 _ Grade It Now Save & Continue