PEOPLE'S DECISION TO RETAIN MORE OR LESS PURCHASING POWER



The  decision  for people to hold more or less  purchasing power than they have done before is the determinate  of them income  and other economic factors. In  1936, economist  john M. Keyures wrote a very fumes and influential  book, the general theory of employment,  interest rate and money. In this book he developed his theory of money demand known as the liquidity preference theory .


Keymes beliefs the three (3)  motives to holding money.
-     Transactions motive: many have is the medium of exchange and people hold money to any staff. So as  income rises people have more transaction and people will hold more money.
-    Precautionary motive people hold  money for emergencies(saving for unexpected job loss etc). since this also departs on  the amount of transactions  peop0le expect to make . money demand is again expected to rise with  income. 
-        Speculative motive money is also of way for people to sore wealth Keynes assumed that people stored  wealth within  either  money or  board  when interest rates are high,  rate it is expected to fall down and the price of bond  would be  expected  to rise. So bond are more attractive than money interest rates are high. When bound prices would be expected to fall. So money is more attracted  than bound when the interests  rate are low so under the speculative motive demand  for money is negatively related to interest rate.
-    The  Nobel price winner (Milton Friedman)  develop a model for money based on the general theory of asset demand.  Money demand  for any other assets should be a function of wealth and the return  of other assets relative to money

In  the  Friedman’s  assumption:
-     Considered the multiple  rates of return and he considered the relative returns to be  important
-    Stressed on goods, money and substitute
-    Assumed income to be  permanent  as more  important than current income in determining money demand
-    He differed from Keynes because he more of the opinion that income  is very stable and that the spared  between return will also be stable since  returns tend to rise or fall. So in Friedman’s model changes in  interest have little or no impact on money demand   

In summary the major reason  why people may hold more or less purchasing power as follows
-          People decide to hold more  purchasing power when they are less  ready to spend more money on  audition of consumable /capital goods.
In  analysis theory  are
1.       They  spend more to buy  goods/services  if they expect a  rise  in the prices  of such goods  in the nearest future.
2.      If they discover a new investment  opportunities
3.      They spend less and hold more cash if the salary income is regularly
While people hold back more purchasing power when  they are expecting  a fall in price of goods and services 
Another  fact that will make people to be unwilling to spend  more money is  when they are afraid of losing than jobs  and when they fined it difficult to  obtain financial  facilities(loan)  from other sources. They can also decide to  hold more purchasing power  when they think it is a better investment   
REFERENCE
Vaish  M.C  (2005) Monetary Theory Sixth Ed. Vikas Publishing House  PVT Ltd

Ibe John N.O (2002)  Fundamentals of  Monetary Theory  and Policy, Gladoh
and Company Abakaliki  Ebonyi Nigeria

John m Keynes, A Web PAGE by economist Brad De Long

Milton Friedman (1998)  Economist  Demand for Money Equation VIXII P 34 
the Economist  Publisher USA
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