Question

What are 2 versions of the money demand function?

Answer 1

The two versions of the money demand function are:
1. Transactions demand of money
2. Speculative demand for money

1. In the Cambridge version of the quantity theory of money, the demand for money Md is expressed as Md = kPY [where Y is income and P is Price level]. Here the classical economists have considered money as only a medium of exchange i.e transactions demand of money and as a result of this, the rate of interest did not affect the money demand in the market. This theory was however reputed by John Maynard Keynes

2. The later economists have recognized another function of money i.e. the Speculative demand for money. Thus in later used Fisher model or version the demand of money M is expressed as MV = PY where V is the velocity of the money. And according to this equation, the money demand is a function of the interest rate and income as well.