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) 0.80 1.00 1.33 2.00 Quantity of Money Demanded (Billions of dollars) 1.5 2.0 3.5 7.0 Value of Money (1/P) 1.25 1.00 .75 .50 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the more ? money the typical transaction requires and the more ? 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 billion Use the orange line (square symbol) to plot the initial money supply (MSi) set by the Fed. Then, referring to the previous table, use the blue connected points (circie symbol) to graph the money demand curve.

Explanation / Answer

The value of money is given by the reciprocal of price level i.e. 1/P.

a) P = 0.8 ; V = 1/0.8 = 1.25

b) P = 1 ; V = 1

c) P = 1.33 ; V = 0.75

d) P = 2 ; V = 0.5

The lower the price level, the less money the typical transaction requires and the less money people will wish to hold in the form of currency or demand deposits.

This is because if the price is low, one would require less money to purchase goods.

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