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    Demand For Money: Dr. M Manjunath Shettigar

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    M Manjunath
    The document discusses two concepts of demand for money: the classical view and the modern view. [1] Under the classical view, money is demanded for exchange transactions and depends on the volume of exchange in the market. [2] The modern view, known as Keynes' view, sees money as being demanded to hold as a store of value due to liquidity preference. [3] The demand for money under this view is influenced by transaction, precautionary, and speculative motives and depends on both income levels and interest rates.

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    Demand For Money: Dr. M Manjunath Shettigar

    Uploaded by

    M Manjunath
    25 views10 pages
    The document discusses two concepts of demand for money: the classical view and the modern view. [1] Under the classical view, money is demanded for exchange transactions and depends on the volume of exchange in the market. [2] The modern view, known as Keynes' view, sees money as being demanded to hold as a store of value due to liquidity preference. [3] The demand for money under this view is influenced by transaction, precautionary, and speculative motives and depends on both income levels and interest rates.

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    Demand for Money

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    The document discusses two concepts of demand for money: the classical view and the modern view. [1] Under the classical view, money is demanded for exchange transactions and depends on the volume of exchange in the market. [2] The modern view, known as Keynes' view, sees money as being demanded to hold as a store of value due to liquidity preference. [3] The demand for money under this view is influenced by transaction, precautionary, and speculative motives and depends on both income levels and interest rates.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    25 views10 pages

    Demand For Money: Dr. M Manjunath Shettigar

    Uploaded by

    M Manjunath
    The document discusses two concepts of demand for money: the classical view and the modern view. [1] Under the classical view, money is demanded for exchange transactions and depends on the volume of exchange in the market. [2] The modern view, known as Keynes' view, sees money as being demanded to hold as a store of value due to liquidity preference. [3] The demand for money under this view is influenced by transaction, precautionary, and speculative motives and depends on both income levels and interest rates.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 10

    Demand for Money

    Dr. M Manjunath Shettigar


    The demand for money
    Two different concepts of demand for money:

    Medium of exchange concept of the demand for


    money-CLASSICAL VIEW

    Store of value concept of the demand for money-


    MODERN VIEW
    CLASSICAL VIEW
    Money is not demanded for its own sake
    Demand arises on account of exchange transactions,
    from the demand for goods and services
    Depends upon the supply of exchangeable goods and
    services available in the market which is not constant
    So is demand for money which varies from time to time
    and determined exclusively by objective factors such
    as volume of exchange transactions

    Equation of Exchange is MV=PT


    M=total quantity of money, V=velocity of circulation
    P=price level, T= total amount of goods and services
    exchanged for money
    Velocity of circulation of money
    A unit of money may be spent several times during
    given period of time

    Average number of times money is transferred from


    one person to another in a given period of time is
    known as velocity of circulation of money

    Hence total supply of money in a given period is


    total amount of money in circulation multiplied by its
    velocity of circulation
    Factors affecting velocity
    i. Quantity of money
    ii. Frequency of cash transactions
    iii. Credit facilities
    iv. System of wage payment
    v. Regularity or irregularity of income
    vi. Size of propensity to consume
    vii. Distribution of income
    viii. Peoples liquidity preference
    ix. Business conditions
    x. Stage of economic development
    xi. Future estimates of prices
    xii. Mobility of credit money
    MODERN VIEW also known as Keynes view
    Demand for money means the demand to hold
    money or cash balances

    Also known as liquidity preference which is the


    demand for liquidity or cash, desire to hold
    assets in cash

    Money is not merely to be spent but held as a


    form of wealth

    It serves as an excellent store of value


    Motives behind liquidity preference
    Transaction motive/demand
    is the need of cash for the current transactions of
    personal and business exchange
    Further split as
    i) business motive : to bridge the interval between the time of incurring business
    costs and receipt of sale proceeds- transaction motives of businessmen,
    industrialists, traders, merchants, etc. who require certain amount of money in
    order to carry on their day-to-day business
    ii) income motive: to bridge the interval between the receipt of income and its
    disbursement- transaction motive of the consumers who require cash
    balances to make day-to-day purchases of goods and services for
    consumption
    Transaction demand for money is directly proportional and
    positive function of the level of income.
    Depends on two things: i)on the business turnover ii) on
    the timing and size of personal incomes
    Precautionary motive/demand
    Desire to provide for contingencies requiring sudden
    expenditure and for unforeseen opportunities of
    advantageous purchases
    Both individuals and businessmen keep cash in
    reserve to meet unexpected needs
    Represents the store of value function of money
    Depends on uncertainty of future
    Depends upon:
    level of income
    business activity
    opportunities for unexpected profitable deals
    availability of cash
    cost of holding liquid assets
    Speculative motive/demand
    A liquid store of value which can be invested at
    an opportune moment in interest bearing bonds
    and securities
    Objective is for speculative purposes with a view
    to earn income
    Uncertainty of future rate of interest causes
    demand for money for the speculative motive
    A decreasing function of rate of interest higher
    the rate, lower the demand for money and lower
    the interest, higher the demand for money
    Is highly volatile depending upon the behaviour
    of interest rates
    Total demand for money
    According to Keynes,
    Transaction motive and precautionary motive is
    primarily a function of level of income, while the
    speculative demand is the function of rate of
    interest
    Thus total demand for money is a function of
    both income and interest rates.

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