If the speculative demand for money is zero in a financially developed economy, as some have...

If the speculative demand for money is zero in a financially developed economy, as some have claimed, is the precautionary demand for money also zero? Evaluate with reference to both M1, M2 and broader monetary aggregates. If both the speculative
and precautionary components of money demand are zero, what about the transactions demand? Consider both households and firms in your answer.

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Expert Solution

Answer:The demand of money is the relationship between the quantity of money people want to hold and the factors that quantity.It is how much of your wealth you wish to hold as money at any moment in time.

In terms of money and resorces,to keep moving in and out of the bonds or other assets and money.Since this is the case,I will desire to hold a certain level of money balances on average,to meet my needs to pay for transanction.This is called the transanction demand for money.

If the interest payments,i receive on bonds and other assets is high,then it is worth my while to move in and out of stocks and bonds and money,so that i can earn this interest payment instead of holding money balances.If the interest rate is nil or zero,there is no point to move in and out of money.

Households:Respective households does not need to hold any risky assests.They can only save their money for their retirement and children education(in case,if it is not take care by government.Like in U.S.A, Higher education is quite expensive.

Firms behaviour:Secondly,regarding the behaviour of firms,The funds supplied under zero money demand may be decrease in the demand of liquidity at constant level of income,reflecting the disinclination for safe assets by firms and household becasuse almost everything provided by governement,that is the only reason of zero money demand.

Rahul Sunny answered 1 year ago

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