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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.It can refer to the demand for money narrowly defined as M1 (directly spendable holdings), or for money in the broader sense of M2 or M3.
The speculative or asset demand for money is the demand for highly liquid financial assets — domestic money or foreign currency — that is not dictated by real transactions such as trade or consumption expenditure. Speculative demand arises from the perception that money is optimally part of a portfolio of assets being held as investments.
The liquidity-preference relation can be represented graphically as a schedule of the money demanded at each different interest rate. The supply of money together with the liquidity-preference curve in theory interact to determine the interest rate at which the quantity of money demanded equals the quantity of money supplied (see IS/LM model).
The velocity of money provides another perspective on money demand.Given the nominal flow of transactions using money, if the interest rate on alternative financial assets is high, people will not want to hold much money relative to the quantity of their transactions—they try to exchange it fast for goods or other financial assets, and money is said to "burn a hole in their pocket" and ...
The precautionary demand for money is the act of holding real balances of money for use in a contingency. As receipts and payments cannot be perfectly foreseen, people hold precautionary balances to minimize the potential loss arising from a contingency. The precautionary demand is dependent on the size of income, the availability of credit ...
A demand function states the relationship between the demand for a product and its various determinants. It is a shorthand way of saying that quantity demanded depends on various determinants. [7] It gives functional relationship (i.e., cause and effect relationship) between the demand for a commodity and various factors affecting demand.
The transactions demand for money is positively affected by the amount of real income and expenditure, and negatively affected by the interest rate on alternative assets, which is the opportunity cost of holding money for any reason. It also depends on the timing of expenditures and the length of the payment period.
Monetary disequilibrium theory is a product of the monetarist school and is mainly represented in the works of Leland Yeager and Austrian macroeconomics. The basic concepts of monetary equilibrium and disequilibrium were, however, defined in terms of an individual's demand for cash balance by Mises (1912) in his Theory of Money and Credit.