9.4.7—Demand for money

The demand for money is the amount of money people wish to hold rather than spend or invest. Transaction and precautionary motives generally rise with income; speculative demand depends on expected interest rates and asset prices.

Holding money has a liquidity benefit but an opportunity cost: the interest that could have been earned on bonds or other assets. Uncertainty, payment technology and confidence also affect the demand.

A household may hold more cash before a large bill, while an investor may hold liquid funds when expecting bond prices to fall and interest rates to rise.

Money demand is not the same as demand for goods, and a higher income does not necessarily raise every component by the same amount.