Transactions demand
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Transactions demand, in
asset demand and precautionary demand
.
Overview
The transactions demand for money refers specifically to money narrowly defined to include only its liquid forms, especially
checking account balances. This form of money demand arises from the absence of perfect synchronization of payments and receipts. The holding of money is to bridge the gap between payments and receipts. The transactions demand for money is motivated by the need to facilitate daily transactions by consumers, businesses, and governments.[1]
The transactions demand for money is one component of the overall demand for money. The other components are the asset or
speculative demand and the precautionary demand
.
The transactions demand for money is positively affected by the amount of real income and expenditure, and negatively affected by the interest rate on alternative assets, which is the opportunity cost of holding money for any reason. It also depends on the timing of expenditures and the length of the payment period.
The
Baumol-Tobin model
focuses on the optimal number of times that funds are moved from other assets into money per unit of time, which dictates the transactions balances held on average over time.
References
- ^ "AP Macroeconomics Review: Money Market". AP Econ Review. Retrieved April 14, 2016.
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