3. Money supply, monay demand, and adjustment to monetary equilibrium The following table gives the quantity of money demanded at various price levels (I'), the money demand schedule. In the following table, Off in the calwren bozied Value of Nancy. Quantity of Money Damandad Price Level (P] Value of Money (1/P) (Billions of dollars) 0.80 2.0 1.50 2.5 1.13 4.0 2.00 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the _ money required to complete transactions, and the 7 money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve Initially fixes the quantity of money supplied at 54 billion. Use the orange line (square symbol) to plot the total money supply (MS, J set by the Fed. Then, referring to the previous table, use the Dive connected points forcle symbol) to graph the mancy demand curve.2 00 -0 1.75 MS, 1.50 O 1.25 Money Domand VALUE OF MONEY 1.00 0.75 MS, 0.80 0.35 QUANTITY OF MONEY (Billions of dollars) According to your graph, the equilibrium value of money is , therefore the equilibrium price level is 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 the public. Use the purple line (diamond symbol) to plot 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 contraction 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 7 and the value of money will