Answer to Question #317590 in Macroeconomics for Buhle

Question

Using a graph illustrate and explain how the motive for holding money relates to the demand for active balances (L1). Let interest rate (i) be on the X-axis and quality of money (M) on the Y-axis

Answer 1

An Increase in Money Demand. An increase in real GDP, the price level, or transfer costs, for example, will increase the quantity of money demanded at any interest rate r, increasing the demand for money from D1 to D2. The quantity of money demanded at interest rate r rises from M to M′. The reverse of any such events would reduce the quantity of money demanded at every interest rate, shifting the demand curve to the left.