Question

Which of the following points relates to the transaction demand for money? 

Options

• It 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

• Both refer to the demand for money for meeting day-to-day transactional needs and As money is a liquid asset (easily acceptable or exchangeable), everyone has the tendency to hold money.  

• None of the above

Answer 1

Both refer to the demand for money for meeting day-to-day transactional needs and As money is a liquid asset (easily acceptable or exchangeable), everyone has the tendency to hold money. 

Explanation:

The desire for money for addressing day-to-day transactional needs is known as transaction demand for money. Everyone has a tendency to hoard money because it is a liquid asset (easily acceptable and exchangeable). People make money at different times of the year, but they consume it all year. As a result, consumers are more likely to keep money on hand for transactions. The following equation can be used to illustrate the relationship between transaction value and money demand In an economy.

The transaction demand for money is expressed 

`"M"_"T"^"d" = "K" "T"`

Or, `1/"K""M"_"T"^"d"` = "T"'

Or, `"vM"_"T"^"d" = "T"`

Where,

v = `1/"K"`, represents the 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"` = The amount of money that people are willing to hold at any given time.

The total value of transactions is favorably associated with the transaction demand for money, but the velocity with which money is exchanged is adversely related.