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 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.