Two Sources of Money Demand transaction Demand for Money.

need money? The primary reason is that people’s incomes and expenditures do not come at the same time For example, I might be paid on the last day of the month but I buy food, newspapers, gasoline, and clothing throughout the month. If I made all my ‘purchases the very instant that I got paid, then I would have no need’ to hold money for the rest of . the time. The need ,to have.money to pay for purchases. or transactions, of goods, services, and other items constitutes the for Figure 254 illustrates the mechanics of transactions demand for money. This figure shows average money holdings a family .that earns per month, keeps it in money. and spend’s it during the month. Calculation will show that the family holds $1500 on average in more balances. ThiS means that as interest rates rose and the family decided to put half its earnings :in a savings account, the ~rage money balance of our family feU from $1500 to $750. This shows more on tell’ .money funds.

In the business sector, however, interest rates have a .r impact on the demand for money to the money. When l retest rates on Large gillies ‘can’ easily find themselves with alternative assets me relative to the  rate on bank ballad (‘PS of $ lOO million one day, $250 million money’r:J:!e and businesses tend to reduce their the next day, and 10 forth. If they do nothing, they money $50 million a year I.n 1. other In addition, people sometimes hold money as an compasses engage'” 10 or store of’ value. But .modern finance theory cash whereby their funds are con- ows that narrow  generally not tartly molested in high-yield assets rather. than lying be part of a well designed portfolio. fallow ,in zero-yield checking accounts. And with higher interest rates, corporations work. a little harder to keep their cash balances at a minimum.

Two Sources of Money Demand transaction Demand for Money.

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