From the above it will be obvious and apparent that in any given time period the whole economic activity depends upon among others on the amount of money supply allowed by the RBI, the proportion in which the general public would like to hold currency and deposits and the scale and speed with which the commercial banks can create credit depending upon the demand.Central bank's monetary policy and the government's fiscal policy together will have a far greater impact on the health of the economy
This is the reason why Alfred Marshall told long ago that money and banking is the center around which the economic science clusters.The current phase of money and banking especially after the exit of Raguram Rajan is not that pleasant to look at .
Going back to the motives of holding money we shall say that Transaction demand for money is the primary motive .Milton Friedman captured this spirit by saying that money is a temporary abode of generalized purchasing power.This also further means that before using the money for transaction money has to rest in the wallet or Almira and there fore medium exchange function pre supposes that money must also serve as a store of value pending its final disposal IN GOODS OR FINANCIAL MARKET,
Keynes introduced the precautionary and speculative motives for holding money.We always keep some money extra to carry out some unexpected purchases or go on unplanned short trip or to take care of the members of the family falling sick..That is precautionary demand for money.
The speculative motive is important in the sense that it is held to take advantage of the fluctuations in the interest rate in the future or any favorable movement in stock prices.It is sufficient to understand that as compared to the active transaction demand for money this idle demand for money is the asset demand for money which will be more active in the financial market..speculation is an intelligent anticipation of future events and many scrupulously gamble on the future interest rate, exchange rate and stock prices.
The liquidity preference ie the decision to sit on the cash and not to spend will rise in times more uncertainty.For instance in times of depression of falling prices and rising unemployment and plausible bank failure and low expected profit both the firms and hoousehold would like to be in cash ie remain liquid and take time to invest in real assets or consumer spending at a future date.Here comes the role of money to the present and the future in uncertainty.
there is also another motive that I coined while delivering a lecture at the central university of Hyderabad long ago.I called it as Sukh ram's suitcase demand for money..Some of you can recall that he was caught with 4 lakhs or crores in asiut case at home and he declared that it was party money and not his personal fortune..Now people hold in thousands and lakhs of crores.Basically it is the politicians ill gotten black money looted from the people and exchequer..During elecion time and or when illegal or illicit trade is conducted in collusion with the criminal elements in society the politicians might find themselves with more cash before it gets siphoned off to swiss accounts or converted into real estates or gold biscuits
This is the reason why Alfred Marshall told long ago that money and banking is the center around which the economic science clusters.The current phase of money and banking especially after the exit of Raguram Rajan is not that pleasant to look at .
Going back to the motives of holding money we shall say that Transaction demand for money is the primary motive .Milton Friedman captured this spirit by saying that money is a temporary abode of generalized purchasing power.This also further means that before using the money for transaction money has to rest in the wallet or Almira and there fore medium exchange function pre supposes that money must also serve as a store of value pending its final disposal IN GOODS OR FINANCIAL MARKET,
Keynes introduced the precautionary and speculative motives for holding money.We always keep some money extra to carry out some unexpected purchases or go on unplanned short trip or to take care of the members of the family falling sick..That is precautionary demand for money.
The speculative motive is important in the sense that it is held to take advantage of the fluctuations in the interest rate in the future or any favorable movement in stock prices.It is sufficient to understand that as compared to the active transaction demand for money this idle demand for money is the asset demand for money which will be more active in the financial market..speculation is an intelligent anticipation of future events and many scrupulously gamble on the future interest rate, exchange rate and stock prices.
The liquidity preference ie the decision to sit on the cash and not to spend will rise in times more uncertainty.For instance in times of depression of falling prices and rising unemployment and plausible bank failure and low expected profit both the firms and hoousehold would like to be in cash ie remain liquid and take time to invest in real assets or consumer spending at a future date.Here comes the role of money to the present and the future in uncertainty.
there is also another motive that I coined while delivering a lecture at the central university of Hyderabad long ago.I called it as Sukh ram's suitcase demand for money..Some of you can recall that he was caught with 4 lakhs or crores in asiut case at home and he declared that it was party money and not his personal fortune..Now people hold in thousands and lakhs of crores.Basically it is the politicians ill gotten black money looted from the people and exchequer..During elecion time and or when illegal or illicit trade is conducted in collusion with the criminal elements in society the politicians might find themselves with more cash before it gets siphoned off to swiss accounts or converted into real estates or gold biscuits
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