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Keynesian Approach Or The Liquidity Preference

 Keynesian Approach or the Liquidity Preference

The Transactions Demand For Money

The transactions demand for money mounts from the medium of exchange role of money in making regular payments for goods and services. As per Keynes, it relates to “the need for cash for the current transactions for personal and business exchange.” It is further more sectioned into earnings and trade motives.

The earnings motive is meant “to bridge the interval amidst the receipt of earnings and its disbursement.” Likewise, the trade motive is meant “to bridge the interval amidst the time of incurring trade costs and that of the receipt of earnings is the sale proceeds.”

If the time amidst the incurring of expenditure and receipt of earnings is less, cash will be held by the people for current transactions demand for money based on the anticipations of earnings recipients and businessmen. They are based on the level of earnings, the rate of interest, the business proceeds, the normal period amidst the receipt and disbursement of earnings etc.

Specified these factors, the transactions demand fro money is a direct proportional and positive function for the level of earnings and is given as follows:

                                                Lr        =          kY

Where Lr, is the transactions demand for money, k is the ration of earnings which is kept for transactions purposes and Y is the earnings.

This equation is represented in the below diagram where the line kY represents a linear and ration association amidst transactions demand and the level of earnings. Presuming k = ¼ and earnings $2000 millions, the demand for transactions balances would be $500 millions at point M.

With enhancement in earnings to $2400 millions the transactions demand would be $600 millions at point N on the curve kY. If the transactions demand drops due to a variation in the institutional and structural situations of the fiscal system the value of k is diminished to say 1/5 and the fresh transactions demand curve is k’Y.

It represents that for earnings of $2000 and $2400 millions, transactions balances would be $400 and 480 millions at point P and Q correspondingly in the diagram.


Thus we conclude that the chief determinant of variations in the real amount of the transactions balances held is variations in earnings. variations in the transactions balances are the consequents of movements along a line like kY somewhat than variations in the inclination of the line. In the equation, variations in transactions balances are the consequents of variations in Y quite than variations in k.

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