The total demand for money is equal to the transactions demand plus the asset demand for money.
(a)Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services.If nominal GDP is $1,000 billion (or $1 trillion),what is the transactions demand?
(b)The table below shows the asset demand at certain rates of interest.Using your answer to part (a),complete the table to show the total demand for money at various rates of interest.

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The Answer is

(c)If the money supply is $260 billion,what will be the equilibrium rate of interest?
(d)If the money supply rises,will the equilibrium rate of interest rise or fall?
(e)If GDP rises,will the equilibrium rate of interest rise or fall?

(a)Transactions demand for money is $200 billion ($1,000/5).
(b)See above table.
(c)The equilibrium interest rate is 8% (where money supply is equal to total demand).
(d)If the money supply increases,the equilibrium interest rate will fall.
(e)The equilibrium interest rate will rise because transactions demand,hence total demand,will rise and intersect money supply at a higher rate of interest.

The Total Demand for Money Is Equal to the Transactions