Final answer:
The transaction demand for money depends on the income level and planned spending, while the asset demand for money is influenced by interest rates and the level of financial uncertainty. Financial markets connect savers, who supply capital, with borrowers, who demand it.
Step-by-step explanation:
The basic determinant of the transaction's demand for money is the level of transactions or spending that individuals and businesses plan to undertake. It is primarily influenced by the income level because as income increases, there is a greater need for money to carry out more frequent transactions. Conversely, the asset demand for money is determined by how much people want to hold their wealth in liquid form rather than in less liquid assets like stocks, bonds, or real estate. Factors affecting the asset demand for money include interest rates and financial uncertainty; lower interest rates and higher uncertainty tend to increase the demand for liquidity.
Financial markets play a key role in facilitating the supply and demand for financial capital. Savers or investors are typically on the supply side, providing their excess funds, while borrowers, seeking capital for investment or expenditures, are on the demand side.