Transactions approach stresses the role of money as a medium of exchange. The essense of money is that it is accepted as a means of payment for other goods and services. Whatever serves as a medium of exchange can be identified as money.

The proponents of this approach are of the view that there exists a qualitative difference between those assets which serve as a medium of exchange and all other assets. While all assets act as a store of value, only a few are accepted as a medium of exchange.

The transactions approach suggests that only that asset which serves as a medium of exchange should be included in the empirical measurement of money.

The proponents of the transactions approach claim that the medium of exchange definition of money is \mpoiVant for a successful monetary policy. The central bank can control the supply of money that is used to make transactions.


Moreover, such a measure of money shows a reliable and predictable relationship to national economic goals. The transactions approach is based on the view that people hold money for spending and making transactions.

When the monetary authority increases the money supply, it leads to a predictable increase in the spending of the people which, in turn, increases national output, national income, employment and the price level.

Similarly, a decrease in the money supply will result in a predictable reduction in community spending, with predictable effects on variables associated with national goals.