Keynesian Theory of Demand for Money (HINDI)

The demand for money refers to how much assets individuals wish to hold in the form of money. It is also referred as liquidity preference. The demand for money is related to income, interest rates and whether people prefer to hold money.
Keynes suggested three motives which led to the demand for money in an economy:
(1) the transactions demand,
(2) the precautionary demand,
(3) the speculative demand.
The transactions demand for money arises from the medium of exchange function of money
Given these factors, the transactions demand for money is a direct proportional and positive function of the level of income and is expressed as
L1 = kY
Where L1 is the transactions demand for money, k is the proportion of income which is kept for transactions purposes, and Y is the income.
The Precautionary motive relates to “the desire to provide for contingencies requiring sudden expenditures and for unforeseen opportunities of advantageous purchases.” Both individuals and businessmen keep cash in reserve to meet unexpected needs.
The speculative demand for money is for securing profit from knowing better than the market what the future will bring forth. Individuals and businessmen having funds, after keeping enough for transactions and precautionary purposes, like to make a speculative gain by investing in bonds. Bond prices and the rate of interest are inversely related to each other.

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