The equilibrium rate of interest in the market for money is determined by the intersection of the

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BlackTom AI · Accepted Answer

To approach this question, we start by identifying what determines the equilibrium interest rate in the money market. The money market equilibrium occurs at the rate where money supply equals money demand. Now, let's analyze each option in that light.

Option 1: 'supply-of-money curve and the total-demand-for-money curve.' This aligns with the standard view that the equilibrium interest rate is set where the money supply intersects the money demand (the total demand for money). The total demand for money typically encompasses all motives for holding money, including transaction and asset motives, so this pairing makes conceptual sense for establishing equilibrium.

Option 2: 'investment-demand curve and the total-demand-for-money curve.' The investment-demand curve pertains to the demand for loanable funds in the context of the capital market, not the money market. This option mixes market frameworks and would not correctly identify the money-market equilibrium condition, since the investment-demand curve is driven by factors like the expected return on investment, not by the quantity of money supplied.

Option 3: 'supply-of-money curve and the asset-demand-for-money curve.' While asset demand is a component of the overall money demand, the equilibrium in the money market is found where the money supply equals the total money demand, not just its asset portion. Focusing only on the asset-demand-for-money curve omits other motives (such as transactions), potentially misrepresenting the full demand side.

Option 4: 'supply-of-money curve and the transactions-demand-for-money curve.' The transactions demand for money is indeed a key component of money demand, especially for day-to-day transactions. However, the full equilibrium typically requires considering the TOTAL demand for money (including both transactions and asset motives). Limiting the intersection to only the transactions-demand part provides an incomplete picture of money-market equilibrium.

In summary, the correct interpretation hinges on the idea that the equilibrium interest rate in the money market is determined where money supply intersects the total money demand, not merely its individual components or market segments. Each of the incorrect options either misidentifies the market (loanable funds vs. money market) or narrows the demand side to a partial component, rather than the comprehensive total demand that interacts with money supply to fix the rate.

The equilibrium rate of interest in the market for money is determined by the intersection of the

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