Demand For Money Flashcards
Motives for holding money
Transactions motive- medium of exchange, people receive money at intervals, they require to hold balances of money
The precautionary motive- unforeseen circumstances can arise, thus individuals hold money as a precaution
Speculative/ assets motive- certain forms and individuals who wish to purchase financial assets, such as bonds , shares or other securities may prefer to wait if they feel the price is likely to fall, or buy more if they are expected to rise
Liquidity preference
The demand for holding assets in the form of money (transactional)
Main determinant is nominal national income
Active balances
Money held for transactions and precautionary measures
Idle balances
Money held for speculative purposes: money held in anticipation of a fall in asset prices
L1
The transactions plus precautionary demand for money =L1
L stands for liquidity preference
The higher people’s money income the greater their nominal expenditure and the bigger their demand for active balances
The less frequently they are paid the greater level of money balances they will need to keep them going to the next payment
High interest rates-people may spend less and save money, bigger effect on precautionary l demand- firms more sensitive to changes
Seasonal - more money for Christmas
Increased use of credit cards has reduced transactional and precautionary demand recently
L2
Speculative demand for assets
Idle balances
Rate interest main determinant
Price expectations
Exchange rate
Rate of return on assets
Total demand
L1+L2
