The price level (P$\mathit{P}$) is a measure of the average level of prices in the economy. The value of money (1P$\frac{1}{\mathit{P}}$) is the value of money measured in terms of goods and services. For example, when the price level is 1.33, the value of money is 11.33=0.75$\frac{1}{1.33}=0.75$. The following table shows that the value of money declines as the price level rises. That is, as the prices of goods and services rise, the number of goods and services that can be purchased with one dollar declines.

The table also shows the positive relationship between the price level and the quantity of money demanded. As the price level rises (and the value of money falls), the typical transaction requires more money, and people will need to hold a larger quantity of money in the form of currency and demand deposits in order to conduct day-to-day transactions. Conversely, as the price level falls (and the value of money rises), the typical transaction requires less money, and people will not need to hold as large a quantity of money to conduct day-to-day transactions.

When the Fed fixes the quantity of money, the money supply curve is a vertical line at the quantity it selects—in this case, $4 billion. The money demand curve slopes downward, passing through each combination from the table of the value of money and the quantity of money demanded. For example, when the value of money is 1.00, the quantity of money demanded is $2 billion. You should have plotted the first point on the money demand curve at the coordinate (2, 1.00), the second at (2.5, 0.75), the third at (4, 0.50), and the fourth at (8, 0.25).

At the intersection of the money supply and money demand curves, the equilibrium quantity of money is $4 billion, the equilibrium value of money (1P$\frac{1}{\mathit{P}}$) is 0.50, and the equilibrium price level is 2.00.

In order to reduce the money supply, the Fed uses open market operations to sell bonds to the public. By selling bonds, the Fed exchanges bonds for money from the public, thereby reducing the amount of money in circulation. The new money supply curve is a vertical line at $2.5 billion.

Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is less than the quantity of money demanded at the initial equilibrium. The reduction in the supply of money causes the demand for goods and services to fall but does not impact the economy's long-run productive capacity. In the long run, the reduction in demand leads to lower prices for products, with no change in the number of products produced. As a result, one dollar will buy more goods and services than before the monetary contraction—in other words, the value of money rises.