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Transactions Demand For Money

In a modern economy, goods and services are purchased with some unit of currency. Therefore, individuals and firms must have on hand a stock of cash sufficient to finance their forthcoming expenditure. The cash balances which individuals and firms keep on hand for this purpose, i.e., purchase of goods and services are called ‘transactions balances’. When we aggregate the quantity of money that all individuals and firms keep on hand fo rte purpose of financing their forthcoming purchases, it is called ‘the transactions demand for money.’

Reasons to Hold Transactions Balances

It is the lack of synchronization between money inflows and money out-flows both for initials and business firms that compel them to hold money in cash for meeting day-to-day transactions. Put differently, if every time an individual or a business firm spent a rupee, it also received a rupee in income, then transacting balances would not be needed because of the perfect synchronsation of receipts and expenditure. The less well-synchronized the low of receipts and expenditure, the larger transitions balances must be.

Determinants of Transactions Demand

We enumerate below the determinants of transactions demand for money:

A household receives income at the beginning of a month. his balances which are large at the beginning of the month will become smaller and smaller until it approaches zero towards the end of the month. Similarly, for a businessman receipts and expenditures are spread over the entire month. Even in their case, receipts and expenditures do not perfectly synchronies, forcing them to keep cash in hand to meet day-to-day expenditures.

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