The demand for money comes from the desire to hold liquid assets of which money is the only perfect example. A rise in transaction costs to buy and sell stocks and bonds. Before publishing your Articles on this site, please read the following pages: This is known as the transactions motive. In Fig. Keynes argued that there are three motives for holding money. Money can be used for any purpose immediately and therefore people desire to hold money either as cash in hand or in the form of readily withdrawable demand deposits in banks. J.M. Keynes calls this desire as “liquidity preference”. The converse is also true. Liquidity preference in the Keynesian analysis is therefore largely a function of uncertainty. So the condition for monetary equilibrium is that the rate of interest will be such that the community, as a whole, is just willing to hold the existing stock of money.Welcome to EconomicsDiscussion.net!
A rise in uncertainty about the future and future opportunities. A rise in inflation causes a rise in the nominal money demand but real money demand stays constant. Likewise, if P increases people will require more money to buy the same amount of goods and services. You're now subscribed to receive email updates! Everyone likes to keep some money in hand by way of precaution against such contingent liabilities and unforeseen expenses. Liquid balances are necessary to bridge the interval between receipt of income and outlay. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences. Since (by assumption) the money supply does not change with the rate of interest the supply curve of money Mo is completely inelastic — a vertical straight line. If the expected loss is greater than the interest payments the net return is negative and the individual concerned will hold no bonds, only money. Keynes supposed at the aggregate level that individuals hold a wide variety of different views about expected rates of interest in future and therefore as the current rate of interest fell more and more people would expect that eventually it would rise again — the price of bonds would fall — and therefore more people would hold only money. where Md is the total demand for money, kPY is transactions and precautionary demand and L(r) is speculative demand. 3 we see how the rate of interest ensures monetary equilibrium. It may be noted that money is not demanded for its own sake but because it can be used to purchase economic goods and services. They also must keep some money in hand for their day-to-day transactions. Thanks. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. A rise in the demand for consumer spending. The demand for money refers to the desire to hold money in liquid form as an alternative to purchasing income-earning assets like bonds. This is known as the precautionary motive. The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money: the transactions, the precautionary, and the speculative motives. Key factors affecting the demand for money. So, the LP curve shows how the total demand for money varies with the rate of interest and it is drawn for a specific level of national income. Income is received periodically. Here, L is liquidity preference (or speculative demand) which is a function of the rate of interest (r) L varies inversely with r. vanes inversely with r. An individual’s preference for liquidity, money, therefore arises because of his uncertainty about the exact point in time when he will need money – the precautionary motive -and his uncertainty about future interest rates – the speculative motive.
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