Transaction motive

Indian Economy glossary

Also called: Transaction demand for money · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 12, Ch 3 "Money and Banking"

Meaning

The transaction motive is holding money to pay for everyday purchases. Income comes in at fixed points in time, such as a monthly salary, but spending goes on all the time. So people must keep some money in hand between paydays. Transaction demand rises with real income (Y) and the price level (P): Mᵀd = kPY Here k is the share of the value of transactions that people keep as money.

Example

You earn ₹100 on day 1 and spend it evenly over the month, ending with nothing. Your average money holding is (100 + 0) ÷ 2 = ₹50. If your income or prices go up, you need to hold more.

Don't confuse with

  • Speculative motive: here money is held instead of bonds because people expect interest rates to change. This demand falls as the interest rate rises.

Related concepts

Read more