What is the basic determinant of (a) the transactions demandand (b) the asset de

Question

What is the basic determinant of (a) the transactions demandand (b) the asset demand for money? Explain how these twodemands can be combined graphically to determine total moneydemand. How is the equilibrium interest rate in the moneymarket determined? Use a graph to show the impact of anincrease in the total demand for money on the equilibrium interestrate (no change in money supply). 2.Distinguish between the Federal funds rate and the primeinterest rate. Why is one higher than the other? Why dochanges in the two rates closely track one another? What is the basic determinant of (a) the transactions demandand (b) the asset demand for money? Explain how these twodemands can be combined graphically to determine total moneydemand. How is the equilibrium interest rate in the moneymarket determined? Use a graph to show the impact of anincrease in the total demand for money on the equilibrium interestrate (no change in money supply). 2.Distinguish between the Federal funds rate and the primeinterest rate. Why is one higher than the other? Why dochanges in the two rates closely track one another? 2.Distinguish between the Federal funds rate and the primeinterest rate. Why is one higher than the other? Why dochanges in the two rates closely track one another?

Explanation / Answer

this is for number 2 Federal Funds rate= the interest rate that the Federal Reservecharges to banks. Prime interest rate=interest the banks charge to lend toconsumers Prime interest rate is higher because the loans are usuallysmaller, because the Federal Reserve can essentially loan as muchas they want and in bulk, their interest rate is very small butprofits are huge, where as individual consumers or businessescannot make as large of a business transactions with the bankscompare to the FED-bank loan, the interest rate tends to be higher.This matches the BULK SUPPLY DISCOUNT THEORY. The changes in both rates affect one another is becauseeverytime the FED raises the interest rate, banks will also raisetheir rates. Since FED is pretty much the money manufacturer andthe Banks are pretty much the money retailer, ..... everytime amanufacture raises prices, the retailer has to to maintain theirprofti on their interest rate! Just like everytime a manufacturehas to raise prices to pay costs, retailers has to raise theirretail sales price to maintain their profit margin Federal Funds rate= the interest rate that the Federal Reservecharges to banks. Prime interest rate=interest the banks charge to lend toconsumers Prime interest rate is higher because the loans are usuallysmaller, because the Federal Reserve can essentially loan as muchas they want and in bulk, their interest rate is very small butprofits are huge, where as individual consumers or businessescannot make as large of a business transactions with the bankscompare to the FED-bank loan, the interest rate tends to be higher.This matches the BULK SUPPLY DISCOUNT THEORY. The changes in both rates affect one another is becauseeverytime the FED raises the interest rate, banks will also raisetheir rates. Since FED is pretty much the money manufacturer andthe Banks are pretty much the money retailer, ..... everytime amanufacture raises prices, the retailer has to to maintain theirprofti on their interest rate! Just like everytime a manufacturehas to raise prices to pay costs, retailers has to raise theirretail sales price to maintain their profit margin

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