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) 1.00 V 2.0 1.33 V 2.5 2.00 V 4.0 4.00 V 8.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the V money the typical transaction requires, and the V money people will wish to hold in the form of currency or demand deposits. Assume that the Bank of Canada initially xes the quantity of money supplied at $2.5 billion. Use the orange line (square symbol) to lolot the initial money supply (M31) set by the Bank of Canada. Then, referring to the previous table, use the blue connected looints (circle symbol) to graph the money demand curve. Ir \\ x?) 1.25 - El 1.00 - M81 0 > g 915 . Money Demand 0 E u. o o % 4 0.50 - MS g 2 0.25 - o |. e 1 2 3 4 5 a 7 3 QUANTITY OF MONEY [Billions ofdollars} According to your graph, the equilibrium value of money is V ,therefore the equilibrium price level is V . Now, suppose that the Bank of Canada increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Bank of Canada can use openmarket operations to V the public. Use the purple line (diamond symbol) to lolot the new money supply (M82). At the initial equilibrium value of money and price level, the quantity of money supplied is now V than the quantity of money demanded. This expansion in the money supply will V people's demand for goods and services. In the long run, slnce the economy's ability to produce goods and services has not changed, the prices of goods and services will V and the value of money will V