Question

8. Please explain the difference between the transaction demand for money and the asset demand for money, and how they work together to determine the total demand for money.

a. The slides and audio should help with this, as well as other sources of information.

Answer 1

Money is demanded for two reasons generally. One for carrying out transactions or purchasing goods. Similarly money serves as store of value. This is asset demand for money. People consider money in relation to other assets like shares, bonds etc and determine how much to demand for asset purpose. Greater the interest rate lower the asset demand because OPPUTUNITY cost of holding money rises. Greater the income greater the transactions demand for money

Both demand combine to form total demand for money. It is simply lateral summation of two demands. But given the money supply if transaction Demand rises speculative demand must fall (interest rate must rise) to equate money supply with money demand. Reverse happens when money supply rises