Money And Banking

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• Summary

There is a cost of holding cash balance, i.e. interest rate. if you are holding excess cash at a certain point of time. you are losing interest. Thus, demand for money is referred to as liquidity preference. In modern economy, people hold money mainly from two motives: transaction motive and speculative motive.

Speculative demand for money: It is demand for money as 'store of wealth'. Wealth can be held (stored) in the form of landed property, bonds, money, bullion, etc. It is speculation about future changes (rise/fall) in interest rate and bond prices that the resulting demand for money is called 'speculative demand for money'.
Relationship between speculative demand for money and rate of interest: Speculative demand for money is inversely related to rate of interest.

Transaction demand for money is the amount of money required over a period of time to carry out all transactions.

Relationship between transaction demand for money and value of transactions.

Transaction demand for money of the economy is fraction of total value (volume) of transactions over a unit period of time. Symbolically,