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Q.2.1 The theory of the demand for money is based on John Keynes’ Liquidity

Preference Theory.

Give your own detailed explanation of liquidity preference theory and how the

demand for money curve is determined. Illustrate your answer graphically.

Note: You should include in your answer a detailed explanation of each

component of the demand for money as well as the determinants of these

components.

(25)

Q.2.2 Your prescribed text explains that the money stock (M) can be determined

endogenously or exogenously (i.e. there are two different approaches to

determining the value of M).

Explain which approach is used in the South African macroeconomy.