The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (p).

Fill in the values of money column in the following table.

1) Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the (more, less) money the typical transaction requires, and the (more, less) money people will wish to hold in the form of currency or demand deposits.

Assume that the fed initially fixes the quality of money supplied at $4 billion.

Use the orange line (square symbol) to plot the initial money supply (MS ₁ ) set by the Fed. Then, referring to the previous table, use the blue connected points (Circle symbol) to graph the money demand curve.

2) According to your graph, the equilibrium value of money is (.50, .75, 1, and 1.25) therefore the equilibrium price level is (.80, 1, 1.33, 2).

3) Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion.

In order to reduce the money supply, the Fed can use open-market operations to (sell bonds to, buy bonds from) the public.

Use the purple line (diamond symbol) to plot the new money supply ( ).

Price Level (P) 0.80 1.00 1.33 2.00 Value of Money (1/P) Quantity of Money Demanded (Billions of dollars) 2.0 2.5 4.0 8.0 VALUE OF MONEY 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0 0 1 5 6 2 3 4 QUANTITY OF MONEY (Billions of dollars) 7 8 0 MS1 Money Demand MS2