DEMAND FOR MONEY

DR SHIVANI MOHAN
ASSISTANT PROFESSOR OF ECONOMICS
C.N.L.U., PATNA
Constituents of Demand for money

 Nominal and Real Cash balance

Theories of the Demand for money

1. Classical-Fisher
2. Neo-classical- Marshall and Pigou
3. Keynesian and
4. Post Keynesian- William Baumol and James Tobin
Keynesian Theory of Demand for Money

 Liquidity preference- The general Theory of Employment Interest and

Money
 Three motive behind demand for money
1. TRANSACTION
2. PRECAUTIONARY
3. SPECULATIVE
Transaction Demand for Money

 Personal income
 Business turnover
 The transaction motive varies proportionately to the changes in money
income
 No role of interest rate
Precautionary Demand for Money

 For contingencies
 For business element of uncertainties, economic fluctuations
 Interest inelastic and constant function of income
 Transaction motive + precautionary motive =active balances
 Relationship between active balances and demand for money income is
proportionately positive
Speculative demand for money

 Keynes called ‘idle balances

 Determined by interest rate and bond prices
 Liquidity Trap

 Keynesian Explanation
 Speculative demand for money highly elastic
 Very Low market interest rate results in low yields on bonds, equities and
other securities
 People prefer to hold cash rather then invest in bonds
 Will wait till bond interest rate become normal
Implications of Liquidity Preference

 Ineffective cheap Monetary Policy

 Interest rate cannot fall to Zero (has to be positive)
 Uncertainty in market so general wage cut ineffective
 Very ineffective role of monetary policy
Thank You!