The diagram below shows the demand for money and the supply of money.

a. Explain why the \(M_{D}\) function is downward sloping.

b. Suppose the interest rate is at \(i_{A}\). Explain how firms and households attempt to satisfy their excess demand for money. What is the effect of their actions?

c. Suppose the interest rate is at \(i_{B}\). Explain how firms and households attempt to dispose of their excess supply of money. What is the effect of their actions?

d. Now suppose there is an increase in the transactions demand for money (perhaps because of growth in real GDP). Beginning at \(i^{*}\), explain what happens in the money market. How is this shown in the diagram?

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Interest Rate 0 Quantity of Money Ms MD (Y, P)