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Please explain the difference between the transaction demand for money and the asset demand for money,...

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.

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Answer #1

Demand for money has 2 components -transaction demand for money and asset demand for money.

Transaction money varies directly with GDP as it is the money kept for purchases.Asset money is the money that is used later and acts as store of value.Asset demand has inverse relation with interest rate. Total demand for money is equal to money demanded for transaction plus money demanded for assets. There is inverse relation between total money demanded and interest rate and so the demand curve for money slopes downwards.

Equilibrium in the money market exist when quantity demanded equals quantity supplied of money .At any interest rate above the equilibrium , there will be excess supply of money and at an interest rate below equilibrium rate there is excess demand for money.By adjusting the money supply the market interest rate can be influenced by the Fed.

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