Objectives of Money Demand Process
1. Definition of demand for money.
2. Motives of holding money.
3. Relationship between interest rates and the demand
for money.
4. The demand for money curve.
5. Other determinants of demand for money.
6. Conclusion.
Overview
Before we start the article of money demand process, lets
look money and its functions in a general way.
As we know money is something that is generally
acceptable as payment for goods & services and
discharge of debt. The value that money have causes
people to make much effort to get it. We know all the
people lives in the world makes a lot of effort every day to
find a money because money covers all their needs
precisely. To go down functions of money are
 Money has a unit of account which means money has
a measure of value.
 Money has a medium of exchange
 Money has a store of value which means money has
durability.
Demand for Money
Demand for money explains the desire of people in a
population need or want to hold money. The demand for
money refers to the desire to hold cash deposits and
liquidity assets or wealth in a form of money. The decision
to hold money rather than other types of assets is a
matter of liquidity which is the degree to which an assets
can be readily converted to spendable cash balance with
out a significant loss in value.
Motives of holding money
There are three types of motives that people hold money,
and they are
1) Transaction Motive
2) Precautionary motive
3) Speculative motive.
1. Transaction Motive
Transaction motive is holding money to purchase goods
and services in day to day basis. Or transaction motive is
money people hold to pay for goods and services they
anticipate buying. When you carry money in your purse or
wallet to buy a movie ticket or maintain a checking
account balance so you can purchase groceries later in
the month, you are holding the money as part of your
transactions demand for money. When transaction motive,
people always hold money to pay daily operations like
buying groceries, vegetables, and also drinking tea and
coffee. All these are daily expenses, so people hold some
cash to pay these daily expenses. When we see the firm
side, firms transaction motive refers to the requirement of
cash by the business for its day-to-day operations. In
general, the firm requires cash for payment of salary, rent,
labour payment, purchase of goods, etc. On the receipt
side, the firm receives cash from sale of goods, debtors
etc. Some times, the inflows and outflows do not match.
Hence, the firm keeps some amount of cash to bridge this
gap.
2. Precautionary Motive
People often demand money as a precaution against an
uncertain future. Unexpected expenses, such as medical
or car repair bills, often require immediate payment. The
need to have money available in such situations is
referred to as the precautionary motive for demanding
money. The desire to hold cash in order to pay for
emergency expenses occurs because money especially
cash is the most liquid asset in the economy. People can
use it to pay for emergency expenses without incurring
traditional losses in value. If people store all of their
wealth, stocks, real estate, jewellery they would first need
to have sell these assets to obtain money, then they get
cash money. Therefore individuals choose to hold their
wealth in a form of money. In case, unexpected expenses
arise include if an emergency occurs a person will likely
want money available to purchase necessary goods and
services at that moment. If an individual don’t diversity
their wealth holdings and are forced to converse, then
less liquid assets to money in a hurry results in a
significant financial loss for the individual.
3. Speculative Motive
Is the desire to hold money to be able to purchase
financial asset at the appropriate time or hedge certain
current financial risk. Individuals may hold some of their
wealth in the form of money waiting to make purchases of
other financial assets as the opportunity arises. Same like
that firms hold some money to make investments like
buying shares, and other investments. For instance firms
may hold money when interest rates are low & speculate
that the rates will increase over time. However, when
interest rates are high this encourage more bond holdings
because of an increased amount of interest that can be
earned when individuals choose to hold their wealth. But
our best religion prohibited in interest.
Relationship between interest rates and the demand for
the money is inversely relationship. When interest rates
increases individuals will choose to hold less money, as
the interest rates fall individuals will choose to hold more
money, and is vice versa.
The demand for the money curve
Interest rate
I
Money Demand
Quantity of money per period
Other determinants of demand for money
We draw the demand curve for money to show the
quantity of money people will hold at each interest rate,
all other determinants of money demand unchanged. A
change in those “other determinants” will shift the
demand for money. Among the most important variables
that can shift the demand for money are the level of
income and real GDP, the price level, and expectations.
Real GDP
A household with an income of $10,000 per month is likely
to demand a larger quantity of money than a household
with an income of $1,000 per month. That relationship
suggests that money is a normal good: as income
increases, people demand more money at each interest
rate, and as income falls, they demand less.
An increase in real GDP increases incomes throughout the
economy. The demand for money in the economy is
therefore likely to be greater when real GDP is greater.
The Price Level
The higher the price level, the more money is required to
purchase a given quantity of goods and services. All other
things unchanged, the higher the price level, the greater
the demand for money.
Expectations
The speculative demand for money is based on
expectations about bond prices. All other things
unchanged, if people expect bond prices to fall, they will
increase their demand for money. If they expect bond
prices to rise, they will reduce their demand for money.
Conclusion
All in all demand for money is the desire of people in a
population need or want to hold money. There are 3
motives of holding money which are transaction,
precautionary, and speculative motive. When interest
rates increases individuals will choose to hold less money,
as the interest rates fall individuals will choose to hold
more money, and is vice versa. And finally, other
determinants of demand money are expectations, real
GDP, and the price level.