The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 0.80 1.5 1.00 2.0 1.33 2.00 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the 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 $3.5 billion. money Use the orange line (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. VALUE OF MONEY Use the orange line (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. 200 1.75 1.50 MS, 125 Money Demand 1.00 070 050 0.25 0 1 4 6 QUANTITY OF MONEY (Billions of dollars) 7 8 MS 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 $3.5 billion to $2 billion. A-2 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 $3.5 billion to $2 billion. In order to reduce the money supply, the Fed can use open market operations to Use the purple line (diamond symbol) to plot the new money supply (MS). the public. than the people's demand for goods and and Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is quantity of money demanded at the initial equilibrium. This contraction in the money supply will 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 the value of money will