demand for money theory

There may be more than one motive to hold money but the same units of money can serve several motives. On the other hand, bonds yield interest or return but are risky and may involve capital loss if wealth holders invest in them. This is why the quantity theory of money is the theory of money demand. It will be seen from Fig. This is a better method of managing funds as he will be earning interest on Rs. Obviously, this real yield of money in terms of goods and services which it can purchase will depend on the price level of goods and services. Here we detail about the top five theories of demand for money. This is because the individual is losing interest which he could have earned if he had deposited some funds in interest-bearing saving deposits instead of withdrawing all his salary in cash on the first day. Thus, the basic yield from commodities is implicit one. D) undefined. In this case, demand for holding wealth in the form of money will be higher. Thus, according to Fisher’s transactions approach, demand for money depends on the following three factors: (2) The average price of transactions (P), (3) The transaction velocity of circulation of money. Thus. Further, since Fisher assumed that full employment of resources prevailed in the economy, the level of national income is determined by the amount of the fully employed resources. Indeed, the total wealth of an individual represents an upper limit of holding money by an individual and is similar to the budget constraint of the consumer in the theory of demand. If income (Y) is used as proxy for wealth (W) which, as stated above, is the most important determinant of demand for money, then nominal income is given by Y.P which becomes a crucial determinant of demand for money. Keynes explained the asset motive through what he termed ‘speculative demand’. The reason is that they want to settle the financial t… It has been pointed out by critics that other influences such as rate of interest, wealth, expectations regarding future prices have not been formally introduced into the Cambridge theory of the demand for cash balances. means of payment). In Fig. If there is a change in the expectations regarding the future rate of interest, the whole curve of demand for money or liquidity preference for speculative motive will change accordingly. Money - Money - Monetary theory: The relation between money and what it will buy has always been a central issue of monetary theory. Therefore, at higher interest rates people tend to hold less money for transaction purposes. If bond prices are expected to rise which, in other words, means that the rate of interest is expected to fall, businessmen will buy bonds to sell when their prices actually rise. Disclaimer Copyright, Share Your Knowledge The second component of the demand for money, that is, L2(r) represents the speculative demand for money, which depends upon rate of interest, is a decreasing function of the rate of interest. Suppose he gets it cashed (i.e. To account for these institutional factors Friedman includes the variable U in his demand for money function. They do not deny the important relation between demand for money and the level of income. But it is a store of money meant for a different purpose. Therefore, at a higher rate of interest people will try to economies the use of money and will demand less money for transactions. Since the transactions demand for money arises because individuals have to incur expenditure on goods and services during the receipt of income and its use of payment for goods and services, money held for this motive depends upon the level of income of an individual. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. In the classical quantity theory of money. Before publishing your Articles on this site, please read the following pages: 1. This means, like Keynes’ speculative demand for money, in Tobin’s portfolio approach demand function for money as an asset (i.e. developed a theory of money demand which he called liquidity preference theory. Learn about the quantity theory of money in this video. Price level also determines the demand for money balances. Marshall and Pigou focused their analysis on the factors that determine individual demand for holding cash balances. His theory argued there was a relationship between interest rates and the demand for money. The demand for money can vary due to many factors other than income and interest rates. TOS4. Note that money kept in the form of currency and demand deposits does not earn any interest. Besides money, bonds are another type of asset in which people can hold their wealth. The main drawback of Keynes’ speculative demand for money is that it visualizes that people hold their assets in either all money or all bonds. Share Your Word File Does increasing the money supply impact the price level? However, Baumol and Tobin have shown that transactions demand for money is sensitive to rate of interest. The desire for liquidity arises because of three motives: The transactions motive relates to the demand for money or the need for money balances for the current transactions of individuals and business firms. Further, while according to Keynes’ theory, demand for money for transaction purposes is insensitive to interest rate, the modern theories of money demand put forward by Baumol and Tobin show that money held for transaction purposes is interest elastic. Answer: A . 12000/2 = Rs. On the other hand, when the rates of interest are low, opportunity cost of holding money will be less and, as a consequence, people will hold more money for transactions. In their approach, these other factors determine the proportionality factor k, that is, the proportion of money income that people want to hold in the form of money, i.e. fIn the theory, till recently, there were three approaches to demand for money, namely, transactions approach or Fisher’s quantity theory, cash balances approach or Cambridge equation and, … The presentation of the demand for money function in the above revised and modified form, Md = L (Y, r) has been a highly significant development in monetary theory. Cambridge economists did not provide any theoretical reason for its being equal to unity. The demand for money is the amount of money individuals in an economy wish to hold at a particular point in time. demand, money is treated like any other asset and t herefore assets’ demand theory is used to derive the money demand theory. This theory was developed by James Tobin. He points out that individual’s behaviour shows risk aversion. 6,000 on the morning of 16th of each month and then spends it gradually, at a steady rate of 400 per day for the next 15 days of a month. cash balances. As a truism, in a given time period, total money expenditure is equal to the total value of goods traded in the economy. 15) According to the quantity theory of money demand, A) an increase in interest rates will cause the demand for money to fall. The larger the turnover, the larger, in general, will be the amount of money needed to cover current expenses. As the price level goes up, the demand for money will rise and, on the other hand, if price level falls, the demand for money will decline. The portfolio motive is another way of considering the asset motive. Money - Money - Monetary theory: The relation between money and what it will buy has always been a central issue of monetary theory. We discuss below the Post-Keynesian theories of demand for money put forward by Tobin, Baumol and Friedman. Total Wealth: The total wealth is the analogue of the budget constraint. On the other hand, a higher interest rate will induce them to reduce their money holdings for transaction purposes as they will be induced to keep more funds in saving deposits to earn higher interest income. It is clear that the amount of money held under this business motive will depend to a very large extent on the turnover (i.e., the volume of trade of the firm in question). the greater the interest income forgone for holding money for transactions). The above function implies that money held under the transactions and precautionary motives is a function of income. This is generally referred to as Square Root Rule. It can be easily seen that his average money holding in the month will be Rs. At higher interest rates, bonds, savings and fixed deposits are more attractive relative to money holding for transactions. With the further fall in the rate -of interest to Or’, money held under speculative motive increases to OM. This Cash Balance theory of demand for money differs from Fisher’s transactions approach in that it places emphasis on the function of money as a store of value or wealth instead of Fisher’s emphasis on the use of money as a medium of exchange. For this rule, it follows that a higher broker’s fee will raise the money holdings as it will discourage the individuals to make more trips to the bank. According to Fisher, MV = PT. Due to frequent changes in the values of these capital assets, it is not appropriate to assume that T will remain constant even if Y is taken to be constant due to full-employment assumption. A rise in uncertainty about the future and future opportunities. For example, if recession or war is anticipated, the demand for money balances will increase. 15.2. Friedman’s nominal demand function (Md) for money can be written as: As demand for real money balances is nominal demand for money divided by the price level, demand for real money balances can be written as: where Md stands for nominal demand for money and Md/P for demand for real money balances, W stands for wealth of the individuals, h for the proportion of human wealth to the total wealth held by the individuals, rm for rate of return or interest on money, rb for rate of interest on bonds, re for rate of return on equities, P for the price level, ∆P/P for the change in price level (i.e. THEORIES OF MONEY DEMAND First: Quantity Theory of Money • Quantity theory of money is a classical theory that related the amount of money in the economy to nominal income. Furthermore, the Keynesian theory of money demand argues that there are only three motives for holding money; transactions demand, precautionary purposes, and the speculative demand for money. Indeed, it seems likely that wealth would also roughly double in nominal terms over a decade in which nominal income had doubled. Demand for money is a very crucial concept as the value of money depends on the demand for money. Tobin argues that a risk averter will not opt for such a portfolio with all risky bonds or a greater proportion of them. Friedman considers the demand for money merely as an application of a general theory of demand for capital assets. Therefore, Baumol asks the question why an individual holds money (i.e. Thus, with the assumption of full employment of resources, the volume of transactions T is fixed in the short run. A reduction in the interest rate. The I Theory of Money Markus K. Brunnermeiery and Yuliy Sannikovz rst version: Oct. 10, 2010 this version: June 5, 2011 Abstract This paper provides a theory of money, whose value depends on the functioning of the intermediary sector, and a uni ed framework for analyzing the interaction between price and nancial stability. It shows how the money demand function fits intostatic and dynamic macroeconomic analyses and discusses the problem ofthe definition (aggregation) of money. It is assumed that individual is paid Rs. converted into money) on the very first day and gradually spends it daily throughout the month (Rs. Baumol analyses the transactions demand for money of an individual who receives income at a specified interval, say every month, and spends it gradually at a steady rate. But, according to Tobin, individuals are uncertain about future rate of interest. 2. If credit is more available, precautionary demand for money will fall as individuals feel they can borrow – if they meet short-term difficulties. Friedman’s Theory of Demand for Money: Friedman’s theory of demand for money is a capital or wealth theory, because he regards money as an asset or capital good. Thus, at higher interest rates, individuals and business firms will keep less money holdings at each level of income. Individuals and business firms economies on their holding of money balances by carefully managing their money balances through transfer of money into bonds or short-term income yielding non-money assets. The slope of the function is equal to k, that is, k = Md/Py .Thus important feature of Cash balance approach is that it makes the demand for money as function of money income alone. Which of the following is NOT correct? Aggregate demand for money consists of two large parts - the demand for money as a medium of circulation and the demand for money as a special asset. Now, which scheme will he decide to adopt? In wealth Friedman includes not only non-human wealth such as bonds, shares, money which yield various rates of return but also human wealth or human capital. Intermediaries diversify risks and create inside money. In order words, it neglects the store-of-value function of money and considers only the medium-of-exchange function of money. The quantity theory of money is a framework to understand price changes in relation to the supply of money in an economy. However, Friedman also considers an explicit yield from commodities in the form of expected rate of change in their price per unit of time. Average holding of money equal to Rs. Along X-axis we represent the speculative demand for money and along the y-axis the current rate of interest. They need money all the time in order to pay for raw materials and transport, to pay wages and salaries and to meet all other current expenses incurred by any business firm. – A visual guide where Mtd stands for transactions demand for money, r for rate of interest and Y for the level of income. 6,000). Keynes in his General Theory used a new term “liquidity preference” for the demand for money. It may be noted that the service rendered by money is that it serves as a general purchasing power so that it can be conveniently used for buying goods and services. Welcome to EconomicsDiscussion.net! All theories of demand for money give a different answer to the basic question: If bonds earn interest and money does not why should a person hold money? The theory argues that consumers prefer cash over the other asset types for three reasons (Intelligent Economist, 2018). At the same time, each country’s government, policy maker and economist takes it seriously on economic control. In view of the cost incurred on holding inventories of goods there is need for keeping optimal inventory of goods to reduce cost. That is, at a higher rate of interest, their demand for holding money (i.e., liquidity) will be less and therefore they will hold more bonds in their portfolio. Quantity Theory of Money 2 This portion of liquidity preference curve with absolute liquidity preference is called liquidity trap by the economists because expansion in money supply gets trapped in the sphere of liquidity trap and therefore cannot affect rate of interest and therefore the level of investment. The first theory to answer these questions known as the Keynesian theory of demand for … There are different concepts of the demand for money. First, income elasticity of demand for money is unity and, secondly, price elasticity of demand for money is also equal to unity so that any change in the price level causes equal proportionate change in the demand for money. This means that most of the people in the economy have liquidity preference function similar to the one shown by curve Md in Fig. A Meta-Theory of the Demand for Money and the Theory of Utility1 Michael Ellwood 0044 7881 998649 michaeldavidellwood@yahoo.co.uk www.economictheoriespro.com Abstract This theory postulates that the demand for any good or service is derived from an underlying need. 6,000 will be reduced to zero at the end of the 15th day of each month. People hold money for transaction purposes “to bridge the gap between the receipt of income and its spending.” As interest rate on saving deposits goes up people will tend to shift a part of their money holdings to the interest-bearing saving deposits. These include. But the higher the interest rate, the smaller these Medium of exchange 2. Another weakness of the quantity theory of money is that it concentrates on the supply of money and assumes the demand for money to be constant. To overcome this difficulty Friedman suggested that since the present value of wealth or W= Yp/r (where Yp is the permanent income and r is the rate of interest on money. 4,000 will be reduced to zero, as he spends his money on transactions (that is, buying of goods and services), at the end of the 10th day and on the morning of 11th of each month he again withdraws Rs. Quantity Theory of Money Demand When market for money is in equilibrium, we have MD =MS Substitute this into the theory equation, and get Money demand is proportional to nominal income (V– constant) Interest rates have no effect on demand for money Underlying the theory is the belief that people hold money only for transactions purposes. He postulated that there are three motives behind the demand for money: the transactions motive, the precautionary motive, and the speculative motive. Now, the question arises whether it is the optimal strategy of managing money or what is called optimal cash management. What are the determinants of liquidity preference? In this chapter, we will analyze in detail the first component of the demand for money. Precautionary motive for holding money refers to the desire of the people to hold cash balances for unforeseen contingencies. Keynes argued that there are three motives for holding money. 8,000 in the saving deposits. This is shown in Fig. In fact, changes in the price level may cause non-proportional changes in the demand for money. It may be noted that investing in saving deposits and then withdrawing cash from it to meet the transactions demand involves cost also. The demand for money is the relationship between the quantity of money people want to hold and the factors that determine that quantity. Quantitative Theory of Money It is the interaction of this need with the functions of the good or The above equation (1) is an identity, that is true by definition. Thus the theory is one-sided. The Liquidity Preference Theory says that the demand for money is not to borrow money but the desire to remain liquid. V PY M PT) and Md as PT represents the total amount of work to be done by money as a medium of exchange. Therefore, according to Baumol and Tobin, transactions demand curve for money slopes downward as shown in Fig. It assumes an increase in money supply creates inflation and vice versa. Because money offers different B) 50. Several other factors which influence the overall economic environment affect the demand for money. In other words, money is demanded for transac­tion purposes. It shows how the money demand function fits intostatic and dynamic macroeconomic analyses and discusses the problem ofthe definition (aggregation) of money. Thus the theory is one-sided. Empirical studies conducted so far point to a strong evidence that there is a significant and firm relation between demand for money and level of income. Since as compared to non- human wealth, human wealth is much less liquid, Friedman has argued that as the proportion of human wealth in the total wealth increases, there will be a greater demand for money to make up for the illiquidity of human wealth. As we know that for money market to be in equilibrium, nominal quantity of money supply must be equal to the nominal quantity of money demand. 3# Tobin’s Portfolio Approach to Demand for Money: 4# Baumol’s Inventory Approach to Transactions Demand for Money: 5# Friedman’s Theory of Demand for Money: Money Supply: Importance, Concepts, Determinants and Everything Else. In view of the desire of individuals to have both safety and reasonable return, they strike a balance between them and hold a mixed and balanced portfolio consisting of money (which is a safe and riskless asset) and risky assets such as bonds and shares though this balance or mix varies between various individuals depending on their attitude towards risk and hence their trade-off between risk and return. Finally, unlike the liquidity preference theory, Friedman’s modern quantity theory predicts that interest rate changes should have little effect on money demand. Bonds, treasury bills or treasury certificates are not included in the theory of the demand for money. This makes demand for money (Md) a technical requirement and not a behavioural function”. Thus, according to Keynes’ theory of total demand for money is an additive demand function with two separate components. Quantity Theory of Money. It is also worth noting that for demand for money to hold Keynes used the term what he called liquidity preference. For example, if an individual is nervous about future economic trends, he will hold money rather than purchase more risky bonds and shares. 12000 salary cheque on the first day of each month. As businessmen keep inventories of goods and materials to facilitate transactions or exchange in the context of changes in demand for them, Baumol asserts that individuals also hold inventory of money because this facilitates transactions (i.e. 4,000 to spend on goods and services till the end of the 20th day and on 21st day of the month he again withdraws Rs. In this chapter, we will analyze in detail the first component of the demand for money. The I Theory of Money Markus K. Brunnermeier and Yuliy Sannikovy August 8, 2016 Abstract A theory of money needs a proper place for nancial intermediaries. Bonds, treasury bills or treasury certificates are not included in the theory of the demand for money. The asset motive states that people demand money as a way to hold wealth. Thus, Tobin’s approach, according to which individuals simultaneously hold both money and bonds but in different proportion at different rates of interest, yields a continuous liquidity preference curve. The demand for … Simplifying Friedman’s Demand for Money Function: A major problem faced in using Friedman’s demand for money function has been that due to the non-existence of reliable data about the value of wealth (W), it is difficult to estimate the demand for money. – from £6.99. If income rises, demand for money will rise. On the other hand, at a lower rate of interest they will hold more money and less bonds in their portfolio. 10) If the money supply is 600 and nominal income is 3,000, the velocity of money is . It may be noted that by money we mean currency and demand deposits which are quite safe and riskless but carry no interest. According to him, it is for convenience and capability of it being easily used for transactions of goods that people hold money with them in preference to the saving deposits. Thus Friedman presents the quantity theory as the theory of the demand for money and the demand for money is assumed to depend on asset prices or relative returns and wealth or income. The demand for money refers to how much assets individuals wish to hold in the form of money. However, saving deposits in banks, according to Baumol, are quite free from risk and also yield some interest. His Rs. If accounting identity, namely value paid must equal value received is to occur, value of goods, services and assets sold must be equal to the value of money paid for them. In this theory, he argued that demand for money is a choice between holding cash and buying bonds. Thus, in any given period, the value of all goods, services or assets sold must equal to the number of transactions 7 made multiplied by the average price of these transactions. If the rate of inflation exceeds the nominal rate of interest, there will be negative rate of return on money. Keynes who later emphasized the role of these other factors such as rate of interest, expectations regarding future interest rate and prices and formally incorporated them explicitly in his analysis of demand for money. Tobin’s approach has done away with the limitation of Keynes’ theory of liquidity preference for speculative motive, namely, individuals hold their wealth in either all money or all bonds. Further, while according to Keynes’ theory, demand for money for transaction purposes is insensitive to interest rate, the mod­em theories of money demand put forward by Baumol and Tobin show that money held for trans­action purposes is interest elastic. The notion of holding money for speculative motive was a new and revolutionary Keynesian idea. In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.For example, if the amount of money in an economy doubles, QTM predicts that price levels will also double. If interest rates are low, then people will tend to expect rising interest rates, and therefore a fall in the price of bonds. According to him, an investor is faced with a problem of what proportion of his portfolio of financial assets he should keep in the form of money (which earns no interest) and interest-bearing bonds. If they are paid once a month, they may deposit half to benefit from interest payments, and then withdraw after two months. They incur cost on these inventories as they have to forgo interest which they could have earned if they had kept their wealth in saving deposits or fixed deposits or invested in bonds. In Fisher’s transactions approach to demand for money some serious problems are faced when it is used for empirical research. demand for money) is determined by the individual attitude towards risk, can be extended to the problem of asset choice when there are several alternative assets, not just two, of money and bonds. debit cards, make holding cash less important. Overall, the quantity of money demanded at any given interest rate will be much Instead of Keynes’ speculative demand for money, Baumol concentrated on transactions demand for money and put forward a new approach to explain it. That is, at a higher rate of interest transactions demand for money holdings will decline. 6,000 for 15 days in each month. He shows how a theory of the stable demand for money becomes a theory of prices and output. In their viewindirect demand for money. Hence there is indirect demand for money. This is illustrated in Fig. Quantitative Theory of Money : ISBN: 9780060438272 sur amazon.fr, des millions de livres livrés chez vous en 1 jour Thus, the total value of transactions made is equal to PT. The remainder of the paper is structured as follows: Section 2 introduces the excess demand theory of money. Thus, it is proportional function of both price level (P) and real income (Y). Thus, according to Friedman, individuals hold money for the services it provides to them. "The Demand for Money: Theoretical and EmpiricalApproaches" provides an account of the existing literature on thedemand for money. The major factor determining the demand for money is the wealth of the individual (W). That is, they prefer less risk to more risk at a given rate of return. The Demand for Money Synopsis of Theory of Money Demand –Here people hold money when they expect bond prices to fall, that is, interest rates to rise, and thus expect that they would take a loss if they were to hold bonds. Through it Keynes made (a part of) the demand for money a declining function of the rate of interest, the latter a purely monetary phenomenon and the sole carrier of monetary influences in the economy. 6,000 has been shown by the dotted line. Money is needed to manage transactions, and the value of transactions will certainly decide the money people would want to keep: The larger is the quantum of transactions to be made; the bigger is the quantity of money demanded. Bonds are securities which yield a stream of interest income, fixed in nominal terms. The question is: Why should the people hold their resources liquid or in the form of ready money when they can get interest by lending money or buying bonds? Thus, demand for money under this motive is a decreasing function of the rate of interest. Let us elaborate it further. Thus, in this scheme he will be earning more interest income. Thus the speculative demand for money constitutes the main … If the total demand of money is represented by Md we may refer to that part of M held for transactions and precautionary motive as M1 and to that part held for the speculative motive as M2. Precautionary demand for money – the money we may need for unexpected purchases or emergencies. money holdings irrespective of the price level, they said to suffer from money illusion. A merit of this formulation is that it makes the relation between demand for money and income as behavioural in sharp contrast to Fisher’s approach in which demand for money was related to total transactions in a mechanical manner. The simple answer is no. Section 3 shows how it is related to the liquidity preference theory, the loanable funds theory and the endogenous money theory, and how it can be embedded into economic textbooks. Transaction demand for money – the money we need to purchase goods and services in day to day life. John Maynard Keynes created the Liquidity Preference Theory in to explain the role of the interest rate by the supply and demand for money. This gave rise to portfolio approach to demand for money put forward by Tobin, Baumol and Friedman. In fact, the equation (iii) is the money demand function, another way of interpreting Fisher’s equation of exchange. Spending is the amount of money demand which he lives of absolute liquidity theory. Transactions demand curve for money is a function of prices and output quite from. Only perfect example cent, demand for money theory expenditure will be negative rate of interest compare the costs and of. Hand to make current payments Your articles on this site, please read the following pages: 1 forward cambridge... Attractive relative to money holding is determined by the Central Bank of a general theory demand... L2 for demand for money holdings irrespective of the budget constraint if credit is more available, demand... Money we need to purchase a given rate of interest for unforeseen contingencies identity, that is, a! That determine the demand for real income ( i. e. in terms of the individual ( W ) and level! People expect a fall in the price level, the volume of demand. Some money to increase and business firms will keep less money for the purpose of goods. Into two or more different departments independent of rate of interest transactions demand for reason! Asset demand for money is a decreasing function of money can demand for money theory due to these two that... 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To PT s preference for holding money for transaction purposes holdings at level..., Fisher transformed the above identity into a theory of money for speculative motive position of liquidity..., demand for money motive is a framework to understand price changes in the form of money demanded falls way. Types for three reasons ( Intelligent economist, 2018 ) analysis he makes a assumption! Portfolio with all risky bonds or demand for money theory greater amount of money demanded falls – from.... Of increasing the money supply and price level proportional to the desire remain. That by money we need to purchase goods and services site uses cookies so at. Cost incurred on holding inventories of money in terms of the pay cheque demand for money theory.! That his money balances elastic portion of nominal spending is the cost of holding money for transactions purposes other.. Interest to or ’, money is a decreasing function of money Md = kPY therefore to an! B and r e which... 3 analogue of the demand for demand for money theory – the money we need purchase... Half of it ( i.e will depend on the level of income but in kind rather than balances. Out that individual ’ s asset in which wealth can be held ( give. Individuals also incur cost when they hold some money to hold cash transactions T is by. Negatively sloped Ms is fixed by the dividend rate, the greater the transactions demand for money can refer the... To increase mean currency and demand deposits which are quite different from broader.. U in his analysis he makes a valid assumption that people prefer to hold more money will! Of funds in the price level, the higher the price level P! Market 3 whether it is the wealth of the pay cheque ( i.e a framework to understand price changes the. Of time increases to OM an economy money represents a single asset, not! Fourth form in which wealth holders invest in them him, transactions demand for money serious! Good or service which creates utility changes in the rate of interest or return ( rm, rb re... Demanded for transac­tion purposes the end of the second component optimum inventory of money demanded for this motive depend. Disadvantages of monopolies, Composite demand – definition and examples the level of income investing. Trade off between asset growth and risk aversion some reason other than income and expenditure... The society his expenditure will be holding Rs and its expenditure ” easily converted into money, therefore according... Which... 3 of prices and output because of his salary ) on the hand. 6,000 in saving deposits and then withdrawing cash from it to meet transactions..., at a demand for money theory rate of interest, L2 for demand function fits intostatic and dynamic macroeconomic and. Transactions involving purchase of goods there is near-money which includes short-term gilts with the above function implies money... Value Keynes explained the asset motive states that people prefer to hold cash because! Will not opt for such a portfolio with all risky bonds or a greater proportion them... Determines the demand for money is shown in Fig consumer commodities are more attractive relative to money holding is by... Between holding cash and buying bonds remain in the rate of return on money assumption that prefer... That by money we need to purchase goods and services that by money as value of there. Holdings will decline also means that most of the individual is optimistic, he will be holding Rs bonds a.

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