Demand for moneyPrepared by Sandrea Butcher

Demand for money

• This refers to the quantity of money that individuals wish to hold.

• Individuals have three motives for holding money.

Transactionary motives• Individuals are paid periodically (weekly, bi

weekly, monthly).• However food has to be bought, utilities have

to be paid, and even bus fares.• Theses regular payments are made during the

course of the month but not at the same time that they are paid.

• Consumers will hold money to make these purchases or transactions.

• These transactions will not depend on interest rates.

Precautionary motives

• Unforeseen circumstances happen in life.• Individuals will put money aside for these

moments.

• The precautionary demand for money does not depend on the interest rate.

Speculative motives

• This demand arises because individuals hope to make gain from changes in the price of bonds.

• A bond is a loan to the government or a firm, with a maturity date in the future.

• Bonds provide interest.•

• If the price levels in a country are increasing interest rates will increase to reduce spending.

• Bonds will be sold to take money out of circulation.• To make the bonds attractive the price paid to

purchase bonds will be lower. Cheap bonds over

here.

• Investors will hold less money since they will be purchasing the bonds.

• Generally, the higher the interest rate the smaller the quantity of money held for speculation.

• The lower the interest rate the greater the money held by investors (they are more liquid)

• The speculative demand for money depends on the interest rate.

• The total demand for money is the sum of the transactionary, precautionary and speculative demands (motives).