Transactions demand

Transactions demand, in economic theory, specifically Keynesian economics, is one of the determinants of the demand for money (and credit), the others being speculative demand and precautionary demand. The transactions demand for money refers specifically to money narrowly defined to include only its most liquid forms, especially cash and checking account balances. This form of money demand arises from the absence of perfect synchronization of payments and receipts. The holding of money is to bridge the gap between payments and receipts. The transactions demand for money is due to the household's motive to hold money for daily transactions and the business's motive to facilitate daily operations. Each component of the output-expenditure formula for GDP (C+Ig+G+Xn) is part of the transactions demand for money.^[1]

Transactions demand for money is one component of the overall demand for money. The other component is the asset demand for money. The asset demand for money is created by people with a liquidity preference and is negatively affected by the nominal rate of interest, which is the opportunity cost of holding money for this or any other reason.^[1]

The transactions demand for money is positively affected by the amount of real income and expenditure, It also depends on the timing of expenditures and the length of the payment period.

The Baumol-Tobin model focuses on the optimal number of transactions per unit of time for a household, which dictates the transactions balances held on average over time.

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