The Keynesian Motives for Money Holding or the motivation for holding money balances is divided in 3 component:
1. Transactions.
2. Precautionary
3. Speculative
Transactions Motive suggests that given institutionalized time lags between receipt of factor incomes and their expenditure outlays, a certain amount of money required for normal transactions, and real value of this transactions demand would be closely related to real income
of economy.
Precautionary Motive says that the cash balances should be held in unforeseen outlays such as an unforeseen medical bill.
Speculative Demand is also called an asset demand and it is used for speculative financial transactions. Keynes has assumed the financial assets to be cash and consols and he argued inverse relationship between bond prices and interest rates. Suppose a bond is issued for $100 paying an annual coupon of $5. The effective rate of interest accordingly is 5%. If market rate later rises to 10%, holder of this bond will be able to obtain only $50 when sold because $50 is all that is required to yield an interest income of $5.
1. Transactions.
2. Precautionary
3. Speculative
Transactions Motive suggests that given institutionalized time lags between receipt of factor incomes and their expenditure outlays, a certain amount of money required for normal transactions, and real value of this transactions demand would be closely related to real income
of economy.
Precautionary Motive says that the cash balances should be held in unforeseen outlays such as an unforeseen medical bill.
Speculative Demand is also called an asset demand and it is used for speculative financial transactions. Keynes has assumed the financial assets to be cash and consols and he argued inverse relationship between bond prices and interest rates. Suppose a bond is issued for $100 paying an annual coupon of $5. The effective rate of interest accordingly is 5%. If market rate later rises to 10%, holder of this bond will be able to obtain only $50 when sold because $50 is all that is required to yield an interest income of $5.