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 [F). Ful to the Value of Moody column Me the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) "BWions of dollars! 1.00 1.00 1.5 1.33 0.39 2.60 0.50 9.5 4.00 0.25 7 7.0 Now consider the relationship between the price level and the quantity of money that people demand. The higher the price level, the more monay the typical transaction requires, and the more ] money people will wish to hold in the form of currency or demand deposits. Assume that the Fad initially ficus the quantity of money supplied at $3.5 billion. Use the orange hoe (square spiribe) to plat the indal money supply fits, J set by the Fed. Then, referring to the previous table, use the blue connected points forcke symbol to graph the moody demand curve. M5 4 Monay Demand VALUE OF MONEY MS QUANTITY OF MONEY (Billiard of dollars) According to your graph, the equilibrium value of money is _ , tharefore the equilibrium price level is _ . Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. In order to reduce the money supply, the Fad can use upan market operations to the public. Use the purple line foumood symbol to plat the new money supply (MS1 1 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 contraction in the money supply will people's demand for goods and Serviceti. 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_