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