Demand for Money Theory

Discipline: Economics

Also known as liquidity preference, demand for money theory deals with the desire to hold money rather than other forms of wealth (for example stocks and shares).

It is particularly associated with the work of English economist John Maynard Keynes (1882-1946).

Keynes distinguished three motives for holding money: the transaction motive (to meet day-to-day needs); the speculative motive (in anticipation of a fall in the price of assets); and the precautionary motive (to meet unexpected future outlays).

The amount of money held is determined by the interest rate and the level of national income.

Monetarists argue that the demand for money is no longer a function of the interest rate and income but that the RATE OF RETURN on a wider spectrum of physical and financial assets influences demand.

Also see: quantity theory of money

Source:
J M Keynes, The General Theory of Employment, Interest and Money (New York, 1936);
D Fisher, Money, Demand and Monetary Policy (Hemel Hempstead 1989)

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