Question

What is transaction demand for money? How is it related to the value of transactions over a specified period of time?

Answer 1

Transaction demand for money refers to the demand for money for meeting day to day transactional needs. As money is a liquid asset (easily acceptable or exchangeable), everyone has the tendency to hold money. People earn incomes at distinct points of time but consume throughout the entire period. So, people tend to hold money for transaction purposes.

The relationship between the value of transactions and transaction demand for money can be explained as:-

The transaction demand for money in an economy `(M_T^d)` can be written as

`M_T^d=KT`

Or, `1/KM_T^d=T`

Where,

`v=1/K,` represents velocity of circulation of money

T = Total value of transactions in the economy over a period of time

K is a positive fraction

`M_T^d=`Stock of money people are willing to hold at a particular point of time.

The transaction demand for money is positively related to the total value of transactions and negatively related to the velocity with which money is circulated.