ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Transaction demand for money The demand for money is a function of prices and income (assuming the velocity of circulation is stable.) If income rises, demand for money will rise. In an inventory model, the demand for holding money depends on the frequency of getting paid, and the cost of depositing money in a bank.

Detailed explanation-2: -The amount of money required for current transactions of companies and individuals is known as transaction demand for money. An example of transaction demand for money is carrying money in your pocket to buy groceries, utensils, to buy a train ticket etc.

Detailed explanation-3: -The demand for money has two components: transactional demand and asset demand. Transactional demand (Dt) is money kept for purchases and will vary directly with GDP. Asset demand (Da) is money kept as a store of value for later use. .

Detailed explanation-4: -Asset demand is the demand for money to buy assets like bonds, equity shares, preference shares, debentures, gold, and others. The money needed for purchasing these assets is the asset demand for money. It is a way of holding wealth. Asset demand for money is inversely affected by the changes in the rate of interest.