2. Money supply, money demand, and adjustment to monetary equilibrium 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 0.80 1.5 1.00 2.0 133 3.5 2.00 7.0 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 billion. Use the orange line (square symbol) to plor 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 Use the orange hine (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 2.00 -O 175 MS, 1 50+ -- 125 Money Demand VALUE OF MONEY 100 075 MS 050 25 0 1 8 3 5 QUANTITY OF MONEY (Billions of dollars) According to your graph, the equilibrium value of money is therefore the equilibrium price level is According to your graph, the equilibrium value of money therefore the equilibrium pnce level is Now, suppose that the red crosses the money supply from the initial level of $3.5 billion to $7 billion In order to increase the money supply, the red can we open market operations to the public Use the purple dine (diamond symbol) to plor the new money supply (MS) 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 expansion 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