Q.State the two motives of Demand for Money.
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Transaction Demand for Money
Start with an everyday intuition
Think about why you carry cash in your pocket or keep money in your savings account. You don't hold money because you love the paper — you hold it because you need to buy things. Between the day you receive your pocket money and the day you spend it, there's a gap. During that gap, you're holding money for no other reason than to make transactions.
That's the core idea: people hold money because they have to pay for goods and services. The more you plan to spend, the more money you need to hold. This is the transaction demand for money.
The precise meaning
In economics, the transaction demand for money refers to the amount of money people and firms want to hold specifically to carry out everyday purchases. It is one of the three motives for holding money identified by Keynes (the other two being precautionary and speculative demand).
The key insight is simple: money is a medium of exchange. If you need to buy groceries, pay rent, or purchase raw materials for your business, you need money in hand (or in your current account) to do so. You cannot pay for most things with your house or your shares — you need the liquid asset called money.
Why it matters
The transaction demand for money creates a direct link between how much money people want to hold and the level of economic activity. When national income rises, people buy more goods and services, so they need to hold more money for transactions. When income falls, they need less.
This relationship is important for understanding how central banks influence the economy. If the central bank prints too much money but people only need a certain amount for transactions, the extra money will chase the same goods — leading to inflation.
The formula (NCERT-based)
MT=k⋅PY
Where:
- MT = transaction demand for money (nominal)
- k = a constant fraction (the proportion of income people want to hold as money for transactions)
- P = general price level
- Y = real national income (or real GDP)
This is the Cambridge equation (also called the cash-balances approach). It says that the amount of money people want to hold for transactions is proportional to their nominal income (PY).
In the NCERT Class 12 Macroeconomics textbook, this is presented as part of the demand for money chapter. The constant k is assumed to be stable in the short run, so the transaction demand for money depends primarily on nominal income.
A diagram in words
Imagine a graph with nominal income (PY) on the horizontal axis and transaction demand for money (MT) on the vertical axis. The relationship is a straight line through the origin with slope k. As nominal income increases, transaction demand for money increases proportionally. …
People hold money for reasons connected to their day-to-day dealings and to gains from holding it, so demand for money arises from more than one motive.
…
The two motives are the transaction motive and the speculative motive.
The demand for money (liquidity preference) arises mainly from two motives:
- Transaction motive: people and firms hold money to meet their day-to-day transactions — buying goods and services and paying bills — because receipts and payments do not occur at the same time. …
- CBSE 2026Set MARCH1 markQ.The principal motive for holding money is to carry out __________,
›Reveal solutionSolution
The blank is filled by transactions.
The transaction motive is the main reason people and firms hold money. Because incomes are received at intervals (say monthly) while spending is continuous, a person needs a stock of money in hand to bridge the gap and settle everyday purchases and payments. This transaction demand for money rises with …
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following asset other than money can also act as a store of value? (A) Gold (B) Land (C) Bonds (D) All of the above
›Reveal solutionSolution
Gold, land and bonds all preserve purchasing power over time, so each can serve as a store of value — making (D) correct.
A key function of money is to act as a store of value — a way of carrying purchasing power from the present into the future. However, money is not the only asset that can do this. In the RBSE/CBSE Class-12 money-and-banking chapter it is noted that wealth can also be stored in other forms:
- Gold — a traditional store of value.
- Land/property — a real asset whose value is preserved or grows. …
- CBSE 2024Set ANNUAL1 markMCQQ.Which one is included in the primary function of money? (A) Medium of exchange (B) Measure of value (C) Both (A) and (B) (D) Store of value
›Reveal solutionSolution
The primary functions of money are medium of exchange and measure of value, so the answer is (C) Both (A) and (B).
In the BSEB Inter / Class-12 Economics money-and-banking unit, the functions of money are classified as primary and secondary. The PRIMARY (main) functions are: (A) medium of exchange — money is accepted in exchange for goods and services, removing the barter problem of double coincidence of wants; and (B) measure of value (unit of account) — money provides a common unit in which the value of all goods is expressed.
…
- CBSE 2023Set ANNUAL1 markQ.What is liquidity trap?
›Reveal solutionSolution
In a liquidity trap, interest rates are already so low that people hoard any extra money instead of lending it, so monetary policy loses its power to stimulate the economy.
People hold money partly to speculate — to be ready to buy bonds when their price is low (interest rate is high) and sell them when their price is high (interest rate is low). When the interest rate is already very low, people believe it can only rise in the future (and bond prices can only fall), so almost everyone prefers to hold money rather than bonds, to avoid an expected capital loss. In this situation, the demand for money to hold as an asset (speculative demand) becomes perfectly elastic with respect to the interest rate — any additional money the central bank injects into the economy is simply held as idle cash rather than being lent out, and so it fails to push the interest rate down any further. Since investment depends on the interest rate, this breaks the usual channel through which an increase in money …
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