Money being a medium of exchange, the primary demand for money arises for making day-to-day transactions. In daily life, the individual or business income and expenditures are not perfectly synchronised. People receive income in periods that donot correspond to the times they want to spend it.
Generally income is received at discrete intervals (for example, once in a week or in a month), but expenditures are made more or less continuously.
Thus certain amount of money is needed by the people in order to carry out their frequent transactions smoothly. In this way, transactions motive refers to the demand for money for bridging the gap between periodic receipts and payments.
While discussing the transactions demand for money, Keynes recognized both the income and the business motive:
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1. Income Motive:
The income motive relates to the transactions motive of the households. The households need to hold money to bridge the time gap between the receipt of their income and its spending in daily transactions.
2. Business Motive:
The business motive refers to the transactions motive of tfie business community. The businessmen require cash balances to meet their business expenses, such as, payment of wages, salaries, payment for raw materials, etc.
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Given society’s basic institutional and technical customs and practices which govern the receipt of income and the flow of expenditures, the transactions demand for money depends upon (a) the personal income and (i) the business turnover.
The demand for money for transactions motive, thus, varies in direct proportionto change in money income the higher the level of money income, the greater the demand for money to make transactions and vice versa. The transaction demand for money is not influenced by the rate of interest; it is interest- inelastic.
Symbolically, the transaction demand for the money function can be stated as:
L, = MY)
ADVERTISEMENTS:
Where Lt Represent the transactions demand for money, k represents the fraction of money income society desires to hold as money because its income and expenditure arc not synchronised, and Y represents money income.
The transactions demand for money is assumed to be a constant and stable func’ion of income because the proportion of income to be kept for transactions purpose is influenced by the institutional and technological arrangements influencing the payment and receipt of money and these arrangements do not change in the short period. Hence, the value of kt is assumed to be constant in the short period.