The statement
that money is held by people for the transaction and precautionary purposes is
in conformity with the classical approach to the demand for money because
transactions demand for money is dependent on money’s function as the medium of
exchange in the economy while the precautionary demand for money can be added
to the classical approach without materially altering its conclusions. The
speculative demand for money, however, marks a
complete break with the
classical theory of the demand for money. The speculative demand for money
recognizes money’s role as the permanent store of value or as Milton Friedman
has termed it the permanent abode of purchase power.
According to the
classicists, people would not hold assets in the unproductive or barren form of
money because by doing so they would have t forgo interest income which could
be earned by purchased interest-bearing riskless government securities instead
of holding money which was barren. Even if the rate of interest was low, it was
better to earn some income than none at all.
REFERENCE
John N.O. Ibe (2000) Fundamentals of
Monetary Theory, Policy
Glahoh and
Company
M.C Vaish (2005) Monetary Theory
Sixteenth Edition,
Vikas Publishing House PVT Ltd
Melzer, Allan H. “The Demand for Money:
The Evidence from the
Time Series,”
Journal of Political Economy (June 1963), PP. 219-46.