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.
(Hint: You do not have to draw separate graphs for each component. You can combine everything
on one set of axes).

Answer 1

The demand for money has two components: transactional demand and asset demand. Transactional demand (Dt) is money kept for purchases and will vary directly with GDP. Asset demand (Da) is money kept as a store of value for later use.