Demand for Money

The demand for money explains the desire of people for a definite amount of moneyMoney is needed to manage transactions, and the value of transactions decides the money people want to keep.

The larger the quantum of transactions, the bigger is the amount of money demanded. Since the quantum of transactions relies upon earning, it should be lucid that a rise in income leads to a rise in the demand for money.

When people stockpile their savings in the form of money rather than keeping it in a bank that fetches them interest, the money people stockpile also relies upon the rate of interest.

Particularly, when interest rates rise, people become less focused on stockpiling money since holding money leads to holding less of interest-earning deposits. Thus, they receive less interest. Hence, the money demanded decreases at high interest rates.

Also read: What is demand?

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