Transaction motive: Transaction motive demand for money refers to holding money to carryout transactions. If we receive our income weekly and make payments on the first day of every week, we need not hold any cash balance throughout the rest of the week. But our expenditure patterns do not normally match our receipts. People earn incomes at discrete points in time and spend it continuously throughout the interval.
The transaction demand for money is represented as follows:
Md T = k. T
Where, T is the total value of transactions in the economy over unit period and k is a position fraction.
b. Speculative motive: Some people hold cash to invest on shares, debentures, gold, immovable properties, etc. The speculative demand for money refers to the demand for money that people hold as idle cash to speculate with the aim of earning capital gains and profits. The speculative demand for money can be written as follows
Where, r is the market rate of interest and rmax and rmin are the upper and lower limits of r, both positive constants. It clearly states that as r decreases from rmax to rmin, the value of speculative demand for money decreases from zero to infinity.
