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?