Question

Why do we need money, or demand money?

Answer 1

Answer

We need money for three purposes

Transaction motive, precautionary motive and speculative motive.

Transaction motive- here money is needed for purchase of goods and services. Money is needed essentially as medium of exchange. Transaction demand for money depends on level of income. Higher the level of income more money is needed for transaction motive.

Precautionary motive- Here money is needed because there is need to store the money to meet the unforeseen expenses like illness, car repair bills.

Speculative motive-Here demand for money take place in circumstances where money is perceived to be less risky than alternative of investing money in asset.