An outline of the motives for holding money

1. Demand for money
Prepared by Sandrea Butcher

2. Demand for money
• This refers to the quantity of money that
individuals wish to hold.
• Individuals have three motives for holding
money.

3. Transactionary motives
• Individuals are paid periodically (weekly, bi
weekly, monthly).
• However food has to be bought, utilities have
to be paid, and even bus fares.
• Theses regular payments are made during the
course of the month but not at the same time
that they are paid.

4. • Consumers will hold money to make these
purchases or transactions.
• These transactions will not depend on interest
rates.

5. Precautionary motives
• Unforeseen circumstances happen in life.
• Individuals will put money aside for these
moments.

6. • The precautionary demand for money does
not depend on the interest rate.

7. Speculative motives
• This demand arises because
individuals hope to make gain from
changes in the price of bonds.
• A bond is a loan to the government
or a firm, with a maturity date in
the future.
• Bonds provide interest.
•

8. • If the price levels in a country are increasing interest
rates will increase to reduce spending.
• Bonds will be sold to take money out of circulation.
• To make the bonds attractive the price paid to
purchase bonds will be lower. Cheap
bonds over
here.

9. • Investors will hold less money since they will
be purchasing the bonds.

10. • Generally, the higher the interest rate the
smaller the quantity of money held for
speculation.
• The lower the interest rate the greater the
money held by investors (they are more liquid)

11. • The speculative demand for money depends
on the interest rate.

12. • The total demand for money is the sum of the
transactionary, precautionary and speculative
demands (motives).