Answer to Question #130619 in Macroeconomics for Kone mulalo

Question

Explain in detail, with the aid of a graph, the two components of the demand for money.
Identify the main determinant of each component.
In your graph, illustrate each component as well as the total demand for money.

Answer 1

The demand for money consists of transactional and speculative

Transaction demand is absolutely inelastic to the interest rate and depends only on income.

As interest rates decrease, liquidity preferences increase, which increases the speculative demand for money and Vice versa.

Dmt - transactional

Dms - speculative

Dm - total demand