1.
DEMAND FORDEMAND FOR
MONEYMONEY

2.
FUCTIONS OF MONEYFUCTIONS OF MONEY
There are two important functions:There are two important functions:
 Serves as store valueServes as store value
 Acts as medium of exchangeActs as medium of exchange
On the basis of these two functions,On the basis of these two functions,
economists have developed twoeconomists have developed two
concepts:concepts:
 The classical approachThe classical approach
 Concept of store valueConcept of store value

3.
CLASSICAL APPROACHCLASSICAL APPROACH
According to classical economists there isAccording to classical economists there is
no direct demand for money. Money helpsno direct demand for money. Money helps
to buy goods and services. Hence there isto buy goods and services. Hence there is
indirect demand for money. In their viewindirect demand for money. In their view
total demand for money depends on thetotal demand for money depends on the
total supply of exchangeable goods andtotal supply of exchangeable goods and
services in the market. The demand forservices in the market. The demand for
money reflects to a particular period ofmoney reflects to a particular period of
time, according to them.time, according to them.

4.
STORE OF VALUE CONCEPTSTORE OF VALUE CONCEPT
This theory is according to modern economists.This theory is according to modern economists.
According to them , the demand for moneyAccording to them , the demand for money
means the demand to hold cash balances.means the demand to hold cash balances.
People demand money not only for spendingPeople demand money not only for spending
purposes but they also keep money in the formpurposes but they also keep money in the form
of wealth. This wealth can be converted intoof wealth. This wealth can be converted into
another form of wealth. Hence, there is a directanother form of wealth. Hence, there is a direct
demand for money.demand for money.

5.
ACCORDING TO LORD KEYNESACCORDING TO LORD KEYNES
Demand for money arise because of itsDemand for money arise because of its
liquidity.liquidity.
He has given three important reasons forHe has given three important reasons for
holding cash balances :holding cash balances :
1.1. Transaction demand for money. It has 2 types:Transaction demand for money. It has 2 types:
 Income motiveIncome motive
 Business motiveBusiness motive
2.2. Precautionary demand for moneyPrecautionary demand for money
3.3. Speculative demand for moneySpeculative demand for money

6.
TRANSACTION DEMAND FORTRANSACTION DEMAND FOR
MONEYMONEY
People use their money for day to dayPeople use their money for day to day
transactions. The demand for money fortransactions. The demand for money for
transaction motive varies in directtransaction motive varies in direct
proportion to change on money income.proportion to change on money income.

7.
INCOME MOTIVEINCOME MOTIVE
The income motive is meant to bridge theThe income motive is meant to bridge the
interval between the receipt of incomeinterval between the receipt of income
and its disbursement. For this purposeand its disbursement. For this purpose
money kept by the people depends onmoney kept by the people depends on
the following purposes:the following purposes:
1.1. The size of incomeThe size of income
2.2. The nature of transactionThe nature of transaction
3.3. The time gap between receipts incomeThe time gap between receipts income
and expenditure.and expenditure.

8.
BUISINESS MOTIVEBUISINESS MOTIVE
It is meant to “bridge the time of incurringIt is meant to “bridge the time of incurring
business costs and that of the receipts ofbusiness costs and that of the receipts of
the sale proceeds.” this refers to thethe sale proceeds.” this refers to the
transaction motive of business people.transaction motive of business people.
They keep cash balances to makeThey keep cash balances to make
payments to labor, inputs, suppliers….payments to labor, inputs, suppliers….
This amount of money depends on theThis amount of money depends on the
volume of transactions the true nature ofvolume of transactions the true nature of
business, etc..business, etc..

9.
PRECAUTIONARY DEMAND FORPRECAUTIONARY DEMAND FOR
MONEYMONEY
The precautionary demand relates to “theThe precautionary demand relates to “the
desire to provide for contingenciesdesire to provide for contingencies
requiring sudden expenditure and forrequiring sudden expenditure and for
unforeseen opportunities of advantagesunforeseen opportunities of advantages
purchase.purchase.

10.
SPECULATIVE DEMAND FORSPECULATIVE DEMAND FOR
MONEYMONEY
Lord Keynes defined it as “the desire orLord Keynes defined it as “the desire or
earning profit by knowing better than theearning profit by knowing better than the
market, what the future will bring fort”.market, what the future will bring fort”.
People keep some money for this purposePeople keep some money for this purpose
to take advantage of market movementsto take advantage of market movements
regarding the future changes in the saveregarding the future changes in the save
of interest or bond prices.of interest or bond prices.