• The preference of the people to keep money in the form of money at a given time can be defined as demand for money.
• Demand for money is based on the following three main factors.
  • Transaction motive
  • Precautionary motive
  • Speculative motive

Transaction Motive

• Since there is a gap between receiving income and spending the income by a person holding money balances for transactions is called demand for money on transaction motive.
• Demand for money on a transaction motive basically depends on the income level  of people.
• There is a positive relationship between the income level and demand for money on transaction motive.
• It can be shown by a function and a graph as below:

Precautionary Motive

• Holding money balances to spend in unexpected situations is known as demand for money on precautionary motive.
• Demand for money on precautionary motive also depends on the income level of people.
• There is a positive relationship between the income and the demand for money on precautionary motive.
• It can be shown by a function and a graph as below:

Speculative Motive

• Demand for money to earn profits in future from investments is called the demand for money on speculative motive.
• There is a negative (inverse) relationship between the demand for money on speculative motive and interest rates.
• It can be shown by a function and a graph as below: