Transactions Motive

# Transactions Motive - The equation of exchange says that MV...

This preview shows pages 1–2. Sign up to view the full content.

Transactions Motive From Last Time If our Japanese students open accounts in American banks, why is the interest considered foreign? The interest earned on a foreign bank account is considered an export for the country in which the account owner resides and an import for the country where the bank is located. Quantity Theory of Money People hold money as a medium of exchange, a store of value, and a unit of account. The transactions motive looks at the demand for money for use as a medium of exchange. The demand for money should depend on the value of transactions. As prices rise, you need more money to buy the same quantity of goods and services. For example, if prices double, you need twice as much money. Changes in nominal money holdings are proportional to changes in the price level. So, we will focus on the demand for real money balances (M/P). The velocity of money, V, is the average number of times a dollar is spent each year to purchase goods and services. Velocity is equal to total spending divided by the quantity of money.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: The equation of exchange says that MV = PY. The quantity theory of money says that V is a constant. Therefore, the demand for real money balances is proportional to aggregate output. As income rises, more transactions are carried out, so the demand for money rises. velvety depends on: • frequency of paychecks • use of credit • transportation speed • communications speed • habits • population density Is the velocity of money really stable? Interest Responsiveness of Transactions Demand The quantity theory assumes that interest rates do not affect the transactions demand for money. However, the funds that people hold for transactions can be held in either cash or savings deposits. There is a tradeoff between the convenience of cash and the interest you earn on your savings account. The higher the interest rate, the less cash you will hold and the more transactions balances you place in your savings account....
View Full Document

{[ snackBarMessage ]}

### Page1 / 2

Transactions Motive - The equation of exchange says that MV...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online