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12 . 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) 0.30 V 1.5 1.00 V 2.0 1.33 V 3.5 2.00 V 7.0 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 $3.5 billion. Use the orange line (square symbol) to plot the initial money supply (M81) set by the Bank of Canada. Then, referring to the previous table, use the blue connected points {Circle symbol) to graph the money demand curve. uilibrium value of money is , therefore the equilibrium price level is 0.50 Canada increases the mone from the initial level of $3.5 billion to $7 billion. 0.75 supply, the Bank of Canada open-market operations to the public. 1.00 1.25 mbol) to plot the new mone (MS2).the equilibrium price level is V . initial level of $3.5 billion to Irket operations to V the public. -market operations to the public. sell bonds to S2). buy bonds from money supplied is now than the quantity of money demanded.greater oply (MS2). less ntity of money supplied is now than the quantity of money demand demand for goods and services. In the long run, since the economy's ability toHe money supply, Lie Dalla Ol Callaud Call Use Upelf-TIdiAct UpElationIs LO diamond symbol) to increase w money supply (MS2). reduce um value of money evel, the quantity of money supplied is now thai money supply will people's demand for goods and services. In the long run, ervices has not changed, the prices of goods and services will and the value of nw money supply {M32}. :vel, the quantity of money sun ow V than the quantity of money demanded. 1 people's demand for goods ices. In the long run, since the economy's ability to ices of goods and services will V and the value of money will V . pol) to plot the new money supply {M32}. noney and price level, the quantity of money supplied is now V than the qua - oney demanded. fall Ily will V people's demand for goods and services. In the long run, since the P's ability to ot changed, the prices of goods and services will V and the value of money will V . 2.00 O 1.75 MS. 1.50 O 1.25 Money Demand 1.00 VALUE OF MONEY 0.75 MS, 0.50 0.25 0 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars)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 $3.5 billion to $7 billion. In order to increase the money supply, the Bank of Canada can use openmarket operations to V the public. Use the purple fine (diamond symbol) to plot the new money supply {M32}. 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, since 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 . Quantity ( Value of Money (HP) (Bii en the price level and H the 7 money peopl: Quantity Value of Money (1/P) B 0.50 1.00 elationsh en the price level and 2.00 tion requ the money pedQuantity of Value of Money (1/P) (Billic 0.67 lationsh 10.75 een the price level and th on requi the money people 1.33 nk of Ca 2.66 tially fixes the quantity oQuantity Value of Money (1/P) (Bill 0.50 relationsh een the price level and t ction requi 1.00 the money peop 2.00 Bank of Ca tially fixes the quantity 4.00The lower the price level, the money r demand deposits. more lessbetween the price level and the q and the money people wi Ha initially more e quantity of m less mbol) to plot the initial money su /mbol) to graph the money dema