Macroeconomics + Economy 2009 Update 18th Edition by Campbell McConnell, Sean Masaki Flynn,Stanley Brue

Exercise 26

KEY QUESTION What is the basic determinant of ( a ) the transactions demand and ( b ) the asset demand for money Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determined Use a graph to show the impact of an increase in the total demand for money on the equilibrium interest rate (no change in money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.