Demand and Supply of Money

• Demand for money


  The demand for money to hold
• Demand for money


  • Depends on the volume of trade or transactions
  • Increases during a boom period or when trade is erratic
  • Decreases during a depression or a lull in trade
• Keynesian Economics


  The modern idea about the demand for money put forward by John Maynard Keynes
• Reasons people want to hold money

  • Transactional motivation
  • Precautionary motive
  • Speculative motivation
• Transaction purpose


  The demand for money or the need for cash for current transactions of individual and business exchanges
• Income motive


  Individuals hold cash to "bridge the interval between the receipt of income and its expenditure"
• Business motive


  Businessmen and entrepreneurs keep cash to meet current needs of various kinds
• Precautionary motive

  The desire to hold cash balances for unforeseen contingencies
• Speculative motive

  The desire to hold resources in liquid form to take advantage of market movements regarding future changes in the rate of interest (or bond-prices)
• Supply of money


  The supply of money to hold
• Components of money supply

  • Metallic money or coins
  • Currency notes issued by the currency authority
  • Chequable bank deposits
• Currency, rather than bank deposits, has a dominant position in developing countries because the majority of commercial transactions are conducted in cash as a medium of exchange, rather than through cheques as in advanced countries
• The supply of money in a country depends on the credit control policies pursued by the banking system of the country