Thus, demand for money under this motive is a decreasing function of the rate of interest. © 2020 Houghton Mifflin Harcourt. The necessity for liquidity on this account arises to bridge the gap between the receipt of incomes and its spending.An individual or a firm receives income at a particular fixed time while its spending is spread over a period of time and in order to meet these expenses, as and when they arise money in cash is needed. 100 has been issued which will carry 5% interest. View Answer. In the opposite case when the feeling is that interest rates would decline, they will invest in the present thus reducing the liquidity of money with them. Test Prep 5. Motives of Demand for Money. The presence of a speculative motive for demanding money is also affected by It may be compared with a water tank. This can be explained with the help of an example. Transaction demand for money. It depends upon the level of income and is interest inelastic. The first two motives provide yield of convenience and certainty. However, money does not possess any utility to directly satisfy the consumers. People demand commodities such as rice, wheat, clothes, etc. Transaction Motive. INTRODUCTION Liquidity preference on this account is also interest-inelastic.The third and the last motive for liquidity preference is the desire to earn profits. Keynes has termed demand for money as liquidity preference.
Say a bond of Rs. The data on money supply (which in equilibrium equals money demand), output, and interest rates are used to estimate the money demand function. 3. A rise in uncertainty about the future and future opportunities. This implies that whatever may be the price of bond but its holder will get a return of Rs. A rise in transaction costs to buy and sell stocks and bonds.

Precautionary Motive We all know that the future is always uncertain. Removing #book# 1 Verified Answer. Keynes has termed demand for money as liquidity preference.People like to keep their money in liquid form (cash) to meet their day-to-day expenses during the period between the receipt and spending of their money. A rise in the demand for consumer spending. The amount needed in this way depends upon the income of the individual. Therefore, it is clear when rate of interest goes up, price of bond goes down and vice-versa.Now the question arises as to how much one should keep money in cash or should invest in bonds and securities. Transaction demand for money – the money we need to purchase goods and services in day to day life. Thus, we find that the speculative demand for money—an integral part of the demand for money in Keynesian theory—represents a distinct break with Classical theory. Many people may think that the rate of interest in the future will be higher and in order to take advantage of this future increase in the rate of interest, they may like to keep money in the liquid form to be invested in securities when the rates of interest actually rise. This is shown in Fig. The asset motive for the demand for broader monetary measures, M2 and M3, states that people demand money as a way to hold wealth. 5.

1 Verified Answer. 15.2. In the Indian economy prior to 1 9 4 7, there was virtually no _____ in the Indian economy. ADVERTISEMENTS: Some of the major motives for which money is wanted by the people are as follows: (a) Transaction Motive (b) Precautionary Motive (c) Speculative Motive. Keynes has called this as ‘Speculative Motive’.Price of bonds and rate of interest are inversely related. The speculative demand for money is inversely related to the interest rate. This motive for liquidity has been called by Keynes as ‘transaction motive*. Classical and Keynesian Theories: Output, Employment no. The precautionary demand for M1 is the holding of transaction funds for use if unexpected needs for immediate expenditure arise. A rise in inflation causes a rise in the nominal money demand but real money demand stays constant.

On the other hand, if the rate of interest declines to Rs. Transaction Motive: The transaction motive refers to the cash required by a firm to meet the day to day needs of its business operations.In an ordinary course of business, the firm requires cash to make the payments in the form of salaries, wages, interests, dividends, goods purchased, etc. Thus the demand for money under speculative motive is a function of the current rate of interest, increasing as the interest rate falls and decreasing as the interest rate rises. You may need to download version 2.0 now from the So these four motives explain why Margie would want to hold some of her wealth in the form of money, and they determine her demand for money. CliffsNotes study guides are written by real teachers and professors, so no matter what you're studying, CliffsNotes can ease your homework headaches and help you score high on exams. It explains why the public may hold surplus cash (over and above that demanded due to the other two motives) in the face of interest- earning bonds (and other financial assets). bookmarked pages associated with this title.

Money is a medium of exchange and this function of it’s gives rise to the transactional motive for demand for money. At higher income level OY 2 , it becomes OB. So everybody holds money and maintain a cash balance for the future uncertainty. Completing the CAPTCHA proves you are a human and gives you temporary access to the web property.If you are on a personal connection, like at home, you can run an anti-virus scan on your device to make sure it is not infected with malware.If you are at an office or shared network, you can ask the network administrator to run a scan across the network looking for misconfigured or infected devices. Therefore, the demand for money cannot be divided into two or more … Completing the CAPTCHA proves you are a human and gives you temporary access to the web property.If you are on a personal connection, like at home, you can run an anti-virus scan on your device to make sure it is not infected with malware.If you are at an office or shared network, you can ask the network administrator to run a scan across the network looking for misconfigured or infected devices.
The increase of business or individuals, all’s future is really uncertain, so they keep cash to meet the future uncertainty risks to overcome.


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