Name Abdul Salam

Roll No. 036

Subject. Money banking and finance

Program. BSAG 4th Semester

Minhaj University Lahore

Demand for money refers to desire to hold money for.fulfilling different
requirements. People keep money for day-to-day activities, to meet
consequential expenses and to invest on shares and debentures. J.M.Keynes, in
his General Theory used a new term ‘liquidity preference’ for the demand for
money. J.M.Keynes suggested three motives which led to the demand for money
in an economy. They are as follows:

(a)Transaction demand for money:

When people hold cash to meet daily transactions is called transaction demand for money. The
transaction motive relates to the demand for money for the day to day expenditure of individuals
and business firms. The need for holding cash arises due to a time gap between receipt of income
and the consumption expenditure. As income increases, people like to spend more and in turn they
demand more money to hold. The Transaction demand for money is represented as follows: Md T =
f (Y) where, Md T represents the transaction demand for money, Y represents the income of an
individual and T represents functional relationship between two variables.

(b) Precautionary Motive:

People keep money to meet unexpected expenses or circumstances, e.g.
people hold cash to meet medical treatment, accidents, emergencies, to
perform some rituals or celebrations etc. We need to hold cash for meeting
such emergencies in our life. If we demand money for such needs, it is known
as precautionary demand for money. As income rises, precautionary demand
for money also gets increased and if the income falls, the precautionary
demand for money also falls. This can be expressed as follows: Mdp = f (Y),
where Mdp represents the precautionary demand for money, Y represents the
income of an individual and ‘f’ represents functional relationship between two
variables.

(c) Speculative Motive:

Some people hold cash to invest on shares, debentures, gold, immovable
properties etc. The speculative demand for money refers to the demand for
money that people hold as idle cash to speculate with the aim of earning
capital gains and profits. According to J.M.Keynes there will be inverse
relationship between the rate of interest and speculative demand for money.
If the rate of interest is low the people desire to keep more cash with them
and vice versa. So, the speculative demand for money is inversely related to
the expected rate of interest. This can be expressed as follows: Mds = f (ie),
where Mds represents the Speculative demand for money, (ie), represents the
expected rate of interest, and ‘f ’ represents functional relationship .