The following table shows a money demand schedule, which is the quantity of mone

Question

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) 1.00 1.33 2.00 4.00 Quantity of Money Demanded (Billions of dollars) 1.5 2.0 3.5 7.0 Value of Money (1/P) money Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the 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 $3.5 bilion. 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.

Explanation / Answer

When P=1, value of money (1/P) = 1/1 = 1 and Md=1.5 billion

When P=1.33, value of money (1/P) = 1/1.33 = 0.75 and Md=2 billion

When P=2, value of money (1/P) = 1/2 = 0.5 and Md=3.5 billion

When P=4, value of money (1/P) = 1/4 = 0.25 and Md=7 billion

Thus, lower the price level, less money the typical transaction requires, and less money people will want to hold in currency or deposits.

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Information on Ms is incomplete to prceed with the question.

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