Transaction money demand
It relates to Money demand for the current transactions of individuals and firms. Individuals demand money in order to bridge the interval between receipt of income and expenditure. A certain amount of money is thus kept in hand to make current expenditures. It will depend upon the size of individual’s income, the interval at which income is received and the method of payment prevailing in the economy.
Businessmen entrepreneurs have to keep a proportion of their resources in money form in order to meet daily need e.g. payment of raw materials, transport, wages etc.
It depends on the volume of trade and turnover of the firm. This motive serves the medium of exchange function
According to Keynes money demanded for this function depends on Y/p (Real income) and is not influenced by the interest
Precautionary demand for money
It refers to as the desire of people to hold cash for foreseen contingencies.
People hold a certain amount of money to provide for the danger of unemployment, sickness e.tc
The amount of money demanded for this motive depends on the type of individual and the condition in which he lives
Speculative demand for money
It relates to the desire to have ones resources in liquid from in order to take advantage of the market movement regarding the future changes in bond prices.
Money held under this motive serve as a store of value just as money held under precautionary motive.
It is store of value meant for a different purpose i.e. to make speculative gains by dealing in bonds whose prices fluctuate.
If bond price are expected to increase i.e. interest rates are expected to reduce businessmen then buy bonds to sell when their price increase and vice versa. Given the expectation about changes in rate of interest less money is held under speculative motive at a higher interest rate and more money is held at lower current ate of interest.
At lower rates less is lost by not investing money while at higher current rate holders of money will loose more by not investing
Therefore this motive is a increasing function of the rate of interest
Kavungya answered the question on March 26, 2019 at 05:40