Transaction demand for money - Money’s most
important function is to act as medium of exchange in the economy consumerous
consumer goods and services. Producer require money to buy play for writing the
factor services if the total income and expenditure flows were perfectly
synchronized income there would be no need to hold cash balances for
transactions purposes. The income and spending flows matched an time. While we
spend daily, income is
received in a lump on the form of salary disbursed by
the employers or once in a year in the form of divided income paid by the
corporation to their share debenture holder or in form of interest paid half-year
by the government to the bond holder.
Precaution demand for money
Apart from
demanding money for transactions purposes, individuals and business require
money to meet the unforeseen contingencies. One finds it convenient to hold
some cash on which he can lean readily when some unforeseen arises. We going
out for shopping one normally takes more money with him than is sufficient for
his planned purchases because his plans might change or he might find some
excellent opportunity in the market t shop at the advantageous terms. To the
business the need for having immediate cash arises to meet contingent
liabilities or unforeseen opportunities to enter into advantageous purchases.
The total quantity of money needed to satisfy the precautionary motive varies
with individuals and firms depending upon their degree of conservatism, nature
of business, access to the money market and the stage of development of the
organized bill market providing facilities of quick conversion of
interest-bearing assets, like bonds, into cash.
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.