The Demand for Money

Individuals and business have three basic reasons for holding money:
1. To facilitate their day-to- day transactions;
2. To be better prepared to cope with unexpected emergencies;
3. And third, as an investment in a financial asset.
These motives are termed the transactions demand for money, the precautionary demand for money, and the speculative demand for money.
The demand for money is a demand for a stock, a desire to hold a particular amount of money. People express their demand for income by selling their labor and other resources. The most obvious reason why people demand money is because it is such a convenient medium of exchange. People demand money to carry out transactions, as we will now see.

Transactions Demand for Money
The transaction demand for money reflects the fact that business forms and individuals need to hold money in some form to pay for their day-to-day purchases and make other necessary payments.
Business and individuals need to keep some money on hand because their cash inflows usually are not timed to occur exactly when cash is needed to make payments. For example, many people are paid on the last day of each month, and they maintain money balances in order to pay bills falling due throughout the next month.
Of course, some of this money could be placed in other types of accounts where the interest rate is higher than for checking accounts and transferred to the latter type of account as needed.
Book References: Lila J. Truett, Dale B. Truett, Times Mirror/Mosby College Publishing Toronto, 1987, “Economics”; William A. M’eachern, South-Western Publishing co Cincinnati, 1988, “Economics A Contemporary Introduction”.