ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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M1 plus M2.
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the tools of the Fed.
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asset demand plus transactions demand.
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checkable deposits and savings accounts.
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Detailed explanation-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. .
Detailed explanation-2: -The demand for money is related to income, interest rates and whether people prefer to hold cash(money) or illiquid assets like money. This shows that the demand for money is inversely related to the interest rate. At high-interest rates, people prefer to hold bonds (which give a high-interest payment).
Detailed explanation-3: -Transaction Demand – based on the household motive to hold money for transactions as a medium of exchange (independent of the interest rate). Asset Demand – the amount of money people want to hold it as assets (store of value) inversely proportional because of opportunity cost of holding money.
Detailed explanation-4: -Generally, the nominal demand for money increases with the level of nominal output (price level times real output) and decreases with the nominal interest rate. The real demand for money is defined as the nominal amount of money demanded divided by the price level.
Detailed explanation-5: -According to Keynes, people hold money (M) in cash for three motives: (i) Transactions motive, (ii) Precautionary motive, and (iii) Speculative motive.