CUET MA Economics | Macroeconomics | Lesson 17 | Keynesian Theory of Demand for money | Liquidity
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This lesson discusses the Keynesian
This lesson discusses the Keynesian Theory of Demand for Money. There are three components of demand for money that are transactions demand for money, precautionary demand for money and speculative demand for money. This lesson further explains the situation of liquidity trap.
Keynes gave this approach in 1936 in his book The General Theory Employment Interest and Money. He suggested three motives for demand for money:
1. Transactions Demand
2. Precautionary Demand
3. Speculative Demand
The Transactions Demand:
This arises due from the medium of exchange function. Most of the people receive their income weekly or monthly while the expenditure goes on day by day.
A certain amount of ready money, therefore, is kept in hand to make current payments. This amount will depend upon the size of individual's income, the interval at which the income is received and the methods of payments prevailing in the society.
The transactions demand is directly proportional and positive function of the level of income. But, he also pointed out that the demand for money in the active circulation is also to some extent a function of rate of interest.
So, in recent years, 2 Post-Keynesian economists, W.J. Baumol and James Tobin have shown that the rate of interest is an important determinant to transactions demand for money. They have also pointed out that the relationship between transactions demand for money and income is not proportional. Rather changes in income lead a proportionally smaller changes in transactions demand.
The Precautionary Demand:
Precautionary motive for holding money refers to the desire of the people to hold cash balances for unforeseen contingencies.
The amount of money demanded for this motive will depend on the psychology of the individual and the conditions in which he lives.
Keynes held that the precautionary demand for money was a function of level of income, like transactions demand but the Post Keynesian economists believe that like transactions demand, it is inversely related to high interest rates.
The Speculative Demand:
The speculative motive of the people relates to the desire to hold one's resources in liquid form in order to take advantage of the market movements regarding the future changes in the rate of interest.
Money held under the speculative motive serves as a store of value for different purpose. The cash held under this motive is used to make speculative gains by dealing in bonds whose prices fluctuate. If bond prices are expected to rise, to which in other words, means that rate of interest is expected to fall, businessman will buy bonds to sell when their prices will rise and vice-versa.
The reason for this inverse relationship between money held for speculative motive and the prevailing rate of interest is that at lower rate of interest, less is lost by not lending money or investing it while at a higher current rate of interest, holders of cash balances would loose more by not lending or investing.
Thus, demand for money under this motive is decreasing function of the rate of interest.
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PDF Link: https://drive.google.com/file/d/1i4_T...
Telegram: https://t.me/triptisangwan
CUET Macroeconomics Playlist: CUET Macroeconomics
Keynes gave this approach in 1936 in his book The General Theory Employment Interest and Money. He suggested three motives for demand for money:
1. Transactions Demand
2. Precautionary Demand
3. Speculative Demand
The Transactions Demand:
This arises due from the medium of exchange function. Most of the people receive their income weekly or monthly while the expenditure goes on day by day.
A certain amount of ready money, therefore, is kept in hand to make current payments. This amount will depend upon the size of individual's income, the interval at which the income is received and the methods of payments prevailing in the society.
The transactions demand is directly proportional and positive function of the level of income. But, he also pointed out that the demand for money in the active circulation is also to some extent a function of rate of interest.
So, in recent years, 2 Post-Keynesian economists, W.J. Baumol and James Tobin have shown that the rate of interest is an important determinant to transactions demand for money. They have also pointed out that the relationship between transactions demand for money and income is not proportional. Rather changes in income lead a proportionally smaller changes in transactions demand.
The Precautionary Demand:
Precautionary motive for holding money refers to the desire of the people to hold cash balances for unforeseen contingencies.
The amount of money demanded for this motive will depend on the psychology of the individual and the conditions in which he lives.
Keynes held that the precautionary demand for money was a function of level of income, like transactions demand but the Post Keynesian economists believe that like transactions demand, it is inversely related to high interest rates.
The Speculative Demand:
The speculative motive of the people relates to the desire to hold one's resources in liquid form in order to take advantage of the market movements regarding the future changes in the rate of interest.
Money held under the speculative motive serves as a store of value for different purpose. The cash held under this motive is used to make speculative gains by dealing in bonds whose prices fluctuate. If bond prices are expected to rise, to which in other words, means that rate of interest is expected to fall, businessman will buy bonds to sell when their prices will rise and vice-versa.
The reason for this inverse relationship between money held for speculative motive and the prevailing rate of interest is that at lower rate of interest, less is lost by not lending money or investing it while at a higher current rate of interest, holders of cash balances would loose more by not lending or investing.
Thus, demand for money under this motive is decreasing function of the rate of interest.
#economicsshortvideo #indianeconomicservice #jrfeconomics #maeconomicsentrance #neteconomics #cuet #cuetmaeconomics #cueteconomics #economics #macroeconomics #graduationeconomics #postgraduaationeconomics #cuetpgeconomics #cuetugeconomics
#triptisangwan #commonuniversityentrancetest #consumptionfunction #consumption #economicsoptional #optionaleconomics #indianadministarativeservice #graduationleveleconomics #commonuniversityentrancetest #triptisangwan #keynesiantheory #moneydemand #transactiondemand #precautionarydemand #speculativedemand #interestrates
PDF Link: https://drive.google.com/file/d/1i4_T...
Telegram: https://t.me/triptisangwan
CUET Macroeconomics Playlist: CUET Macroeconomics
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