Two Forms of Demand for Money

723 Words Feb 22nd, 2018 3 Pages
To determine how much money individuals are going to want to hold there are a plethora of determinants that must be analyzed. Demand for money is broken down into two forms of demand, transaction demand for money and portfolio demand for money (Cecchetti). These two forms of demand are based on money as it is used to pay for goods and money as it is used as a store of value. The econmony and the demand for money are always changing. In today’s society more changes are approaching now that Janet Yellen has become Chair of the Federal Reserve.
Transaction demand for money is the first form of demand. Transcation demand for money is defined as demand for money realted to how much money a person needs in order to buy goods or services (Harvey). The determinants of transaction demand for money are nominal income, the cost of holding money, and the availability of other substitues. Nominal income is directly related to consumer spending. The higher nominal income is the higher consumer spending will be. Demand for money increases with consumer spending (Moffatt). The cost of holding money also affects the demand for money. The cost of holding money is the interest a person does not earn because they did not use their money to buy interest bearing bonds. Therefore, interest plays a huge part in the demand for money. An expected rise in interest rates will cause the demand for…