What is precautionary money?

Precautionary money balances are held to moderate the impact of unexpected spending needs that can occur in the future. The factors that drive the demand for precautionary money balances are similar to those analyzed for transaction money balances.

What is transaction and precautionary demand for money?

Transaction demand – money needed to buy goods – this is related to income. Precautionary demand – money needed for financial emergencies. Asset motive/speculative demand – when people wish to hold money rather than buy assets/bonds/risky investment.

What is meant by demand for money?

In monetary economics, the demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits rather than investments. The demand for those parts of the broader money concept M2 that bear a non-trivial interest rate is based on the asset demand.

What are the three demands for money?

The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money: the transactions, the precautionary, and the speculative motives.

What is precautionary motive of money?

Precautionary motive. A desire to hold cash in order to be able to deal effectively with unexpected events that require cash outlay.

What is demand and supply for money?

While the demand of money involves the desired holding of financial assets, the money supply is the total amount of monetary assets available in an economy at a specific time.

What are the two types of demand for money?

Given our explanations of the functions of money, it will not be surprising that there are two different types of demand for money. The first is called the transactions demand and the second is called the asset demand.

What are the 3 motives for holding money?

Motives for Holding Money

  • Transaction Motive: to pay for goods or services. It is useful for conducting everyday transactions or purchases.
  • Precautionary Motive: it’s a relatively safe investment.
  • Asset or Speculative Motive: it can provide a return to their holders.

What is speculative motive for money?

Definition: It is a tactic used by investors/ traders to hold cash so as to make the best use of any investment opportunity that arises later on. In such a situation, the cash kept aside by the investor equips him to exploit such an attractive investment opportunity. …

What shifts the supply of money?

When money demand increases, the demand curve for money shifts to the right, which leads to a higher nominal interest rate. When the supply of money is increased by the central bank, the supply curve for money shifts to the right, leading to a lower interest rate.

What happens to the demand for money when a person’s income increases?

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.

What are the motives of demand for money?

Transaction Motive Money is a medium of exchange and this function of it’s gives rise to the transactional motive for demand for money. We regularly need money to pay for goods and services. And such financial transactions can be of two types – income motive and business motive.

What is the total demand for money?

The demand for money refers to the total amount of wealth held by the household and companies. The demand for money is affected by several factors such as income levels, interest rates, price levels (inflation), and uncertainty. The impact of these factors on the demand for money is explained in terms of the three primary reasons to hold money.

What is Keynesian analysis of the demand for money?

In his General Theory of Employment, Interest and Money (1936), J.M. Keynes expounded his theory of demand for money. Essentially, Keynes’ theory of demand for money is an extension of the Cambridge cash-balances approach and stresses the asset role (i.e., the store of value function) of money. In contrast to the Fisherian view of what people ‘have to hold’, the Keynesian view stated that the demand for money is determined by what people ‘want to hold’.

Why do people demand for money?

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.