Question

Write the equation for transactionary demand for money.

Hint:

The transactionary demand for money is directly related to the level of national income and the frequency of transactions.

Answer 1

The transactionary demand for money refers to the demand for money for the purpose of carrying out transactions, such as buying goods and services. This type of demand is influenced by the level of income and the frequency of transactions in an economy. The equation for the transactionary demand for money is given as: \[ M_T = k \cdot Y \] where: - \( M_T \) is the transactionary demand for money,
- \( Y \) is the national income or output,
- \( k \) is a constant that represents the proportion of income held in the form of money for transaction purposes.

Step 1: Income and Transactions.
The transactionary demand for money is directly related to the level of national income, as higher income levels lead to more transactions and, therefore, a greater demand for money to carry out these transactions.

Step 2: Determining the Constant \( k \).
The constant \( k \) is determined by factors such as the velocity of money and the frequency of transactions in the economy. It represents how much money people want to hold for transactions relative to their income. The value of \( k \) can vary depending on the economic conditions and cultural habits of the people.

Step 3: Implications of the Equation.
The equation shows that as national income increases, the transactionary demand for money increases proportionally. This is because higher income leads to more goods and services being bought, requiring more money to facilitate these transactions. Conversely, if income falls, transactionary demand for money will decrease.