demand for money

Money Demand

demand for money

The demand for money represents the desire of households and businesses to hold assets in a form that can be easily exchanged for goods and services. Spendability (or liquidity) is the key aspect of money that distinguishes it from other types of assets. For this reason, the demand for money is sometimes called the demand for liquidity.

The demand for money is often broken into two distinct categories: the transactions demand and the speculative demand.

The primary reason people hold money is because they expect to use it to buy something sometime soon. In other words, people expect to make transactions for goods or services.

How much money a person holds onto should probably depend on the value of the transactions that are anticipated. Thus a person on vacation might demand more money than on a typical day.

Wealthier people might also demand more money because their average daily expenditures are higher than the average person’s.

However, in this section we are interested not so much in an individual’s demand for money but rather in what determines the aggregate, economy-wide demand for money. Extrapolating from the individual to the group, we could conclude that the total value of all transactions in the economy during a period would influence the aggregate transactions demand for money.

Gross domestic product (GDP), the value of all goods and services produced during the year, will influence the aggregate value of all transactions since all GDP produced will be purchased by someone during the year. GDP may underestimate the demand for money, though, since people will also need money to buy used goods, intermediate goods, and assets.

Nonetheless, changes in GDP are very ly to affect transactions demand.

Anytime GDP rises, there will be a demand for more money to make the transactions necessary to buy the extra GDP. If GDP falls, then people demand less money for transactions.

The GDP that matters here is nominal GDP, meaning GDP measured in terms of the prices that currently prevail (GDP at current prices).

Economists often break up GDP into a nominal component and a real component, where real GDP corresponds to a quantity of goods and services produced after eliminating any price level changes that have occurred since the price level base year. To convert nominal to real GDP, simply divide nominal GDP by the current U.S. price level (P$); thus

real GDP = nominal GDP/P$.

If we use the variable Y$ to represent real U.S. GDP and rearrange the equation, we can get

nominal GDP = P$ Y$.

By rewriting in this way we can now indicate that since the transactions demand for money rises with an increase in nominal GDP, it will also rise with either an increase in the general price level or an increase in real GDP.

Thus if the amount of goods and services produced in the economy rises while the prices of all products remain the same, then total GDP will rise and people will demand more money to make the additional transactions.

On the other hand, if the average prices of goods and services produced in the economy rise, then even if the economy produces no additional products, people will still demand more money to purchase the higher valued GDP, hence the demand for money to make transactions will rise.

The second type of money demand arises by considering the opportunity cost of holding money. Recall that holding money is just one of many ways to hold value or wealth. Alternative opportunities include holding wealth in the form of savings deposits, certificate of deposits, mutual funds, stock, or even real estate.

For many of these alternative assets interest payments, or at least a positive rate of return, may be obtained. Most assets considered money, such as coin and currency and most checking account deposits, do not pay any interest.

If one does hold money in the form of a negotiable order of withdrawal (NOW) account, a checking account with interest, the interest earned on that deposit will almost surely be less than on a savings deposit at the same institution.

Thus to hold money implies giving up the opportunity of holding other assets that pay interest. The interest one gives up is the opportunity cost of holding money.

Since holding money is costly—that is, there is an opportunity cost—people’s demand for money should be affected by changes in its cost.

Since the interest rate on each person’s next best opportunity may differ across money holders, we can use the average interest rate (i$) in the economy as a proxy for the opportunity cost.

It is ly that as average interest rates rise, the opportunity cost of holding money for all money holders will also rise, and vice versa. And as the cost of holding money rises, people should demand less money.

The intuition is straightforward, especially if we exaggerate the story. Suppose interest rates on time deposits suddenly increased to 50 percent per year (from a very low base).

Such a high interest rate would undoubtedly lead individuals and businesses to reduce the amount of cash they hold, preferring instead to shift it into the high-interest-yielding time deposits. The same relationship is quite ly to hold even for much smaller changes in interest rates.

This implies that as interest rates rise (fall), the demand for money will fall (rise). The speculative demand for money, then, simply relates to component of the money demand related to interest rate effects.

Key Takeaways

  • Anytime the gross domestic product (GDP) rises, there will be a demand for more money to make the transactions necessary to buy the extra GDP. If GDP falls, then people demand less money for transactions.
  • The interest one gives up is the opportunity cost of holding money.
  • As interest rates rise (fall), the demand for money will fall (rise).


  1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

    1. Of increase, decrease, or no change, the effect on the transactions demand for money when interest rates fall.
    2. Of increase, decrease, or no change, the effect on the transactions demand for money when GDP falls.
    3. Of increase, decrease, or no change, the effect on the speculative demand for money when GDP falls.
    4. Of increase, decrease, or no change, the effect on the speculative demand for money when interest rates fall.


Money Demand and Money Velocity

demand for money

An economy works best when inflation is low and predictable, but to control inflation, one needs to understand what causes it.

Over the long run, inflation is largely determined by how much the money supply increases over increases in real GDP.

In the short run, inflation also depends on the velocity of money, which inversely depends on the demand for money. This can be seen from the equation of exchange (discussed in the previous article):

M × V = P × Y = Nominal GDP

  • M = Quantity of Money
  • V = Velocity of Money
  • P = Nominal Price
  • Y = Real GDP


wise, price changes are caused by changes in these factors:

So, in the short term, the supply of money and the real GDP are considered constant, so changes in price result from changes in the velocity of money:


Demand for Money

Everybody wants money. But when economists and bankers talk about the demand for money, they are not talking about the demand for wealth. Instead, they are talking about how much individuals and firms want to be liquid, how much money they want to hold for future purchases or investments.

Liquidity is the ability to make payments, which equals the amount of cash being held by individuals or firms plus any assets that can easily be converted to cash for little or no fees and with no loss of value. Thus, the demand for money can also be called a liquidity preference. Money is a generic term, which is anything that can be used as a means of payment.

However, when discussing the demand for money, economists and bankers are talking about MZM money.

The Federal Reserve defines 3 major classes of money. M1 money consists of cash in the form of currency and coins, traveler's checks, demand deposits, and checkable deposits.

M2 money consists of M1 plus savings deposits, certificates of deposit of less than $100,000, and money market deposits.

Because technology has blurred the distinction between M1 and M2 money in terms of liquidity, a new category of money has been created to reflect the increased liquidity of most types of M2 money.

MZM money, which is money with zero maturity, consists of currency and coins plus all financial assets that are redeemable at par on demand, including traveler's checks, demand deposits, other checkable deposits, savings deposits, all money market funds, but not time deposits. In other words, MZM money is M2 money minus time deposits.

The demand for money is the proportion of one's wealth that is held as a means of payment or as assets that can easily, inexpensively, and with little risk of loss of value easily be converted into a means of payment.

Even though money held in savings accounts or in money market funds earns some interest, in this context, they are not considered investments, because they do not earn much interest, and there's little risk for loss.

People use these accounts to earn some interest while maintaining liquidity, thus satisfying the demand for money.

For instance, it is often advised to save at least 6 months of living expenses, in cases of emergencies or a job loss.

Such savings would probably be held in a savings account or a money market fund, because it can quickly be converted into a means of payment without incurring transaction fees and with little risk.

On the other hand, the amount of money invested in bonds or stocks does not satisfy the demand for money, because, although they can quickly be sold for cash, the sale incurs transaction costs, but more importantly, they may be sold at a loss, if the money is needed at a certain time.

The Demand for Money and the Velocity of Money Are Inversely Related

Over the long-term, the link between money growth and inflation is strong, but, in many cases, money velocity is not constant over the short term, so some short-term inflation may be caused by an increase in the velocity of money.

Although the velocity of money cannot be measured directly nor is it predictable over the short term, it is determined by both the demand for money and the supply quantity of money.

An increased money supply will lower money velocity, while a decreased money supply will increase money velocity, all else being equal. But, in the short term, the money supply is considered constant.

The velocity of money is the frequency that one unit of currency is used to purchase domestically produced goods and services within a given duration, i.e.

, the number of times a dollar bill is spent to buy final goods and services per unit of time.

(To avoid double counting, economists only measure the prices of final goods and services, since the prices of intermediate products and services are included in the final prices.)

By definition, money velocity increases when money is spent more frequently for final goods and services per unit of time. Additionally, money velocity can be increased indirectly by increased investments.

Although an investment is not a purchase of a final good or service, it does stimulate such purchases by lowering the interest rate, since it is well-established that — all else being equal — lower interest rates stimulate aggregate demand, which is the total demand for all goods and services produced by an economy.

How increased investments can reduce the interest rate can best be illustrated with bonds. Because bond yields are inversely proportional to bond prices, an increased demand for bonds will raise their prices, thus lowering their yields.

This means that companies can issue bonds at lower yields, which decreases their demand for loanable funds, thereby propagating the decrease in interest rates throughout the economy.

wise, purchases of stock can also lower general interest rates, because companies that obtain funding by issuing stock will have a lower demand to borrow money.

Hence, a lower demand for money increases money velocity in 2 ways: an increase in spending and/or an increase in investments. wise, higher demand for money will decrease spending and/or investments, which decreases the velocity of money.

Therefore, any factors that cause people to hold money will decrease the velocity of money, while factors that increase spending or investment will increase the velocity of money. Therefore, the demand for money is inversely related to the velocity of money.

To understand how the velocity of money changes, one must understand what changes the demand for money.

Under most economic models, over the long-term, inflation depends on how much the growth of the money stock exceeds real GDP. The supply of money is the only factor that politicians can control, at least directly. Real GDP and the velocity of money cannot be controlled legally or politically.

So to control inflation by targeting the money growth rate, a central bank must know what influences the demand for money and how changes in monetary policy rules will influence that demand.

The Effect of Lower Interest Rates Will Depend on Debt Load and Economic Conditions

The increase in aggregate demand with lower interest rates will depend on the debt load of consumers and firms and on economic conditions. While lower interest rates do stimulate aggregate demand, with all else being equal, the magnitude of this effect will depend on debt loads and economic conditions.

High debt loads will decrease the stimulatory effect of lower interest rates, because debtors will be reluctant or unable to increase their debt load. Furthermore, they must decrease spending and investments to pay their debt.

wise, when economic conditions are poor, consumers and firms will be reluctant to increase spending or to increase investments, because of the increased risk. This is best illustrated by the prolonged period for the economy to emerge from the Great Recession of 2007 to 2009, despite record low interest rates.

Consumers and firms were deeply in debt, so their creditworthiness had declined dramatically. Additionally, because banks wanted to avoid more losses, their lending requirements became stricter. Thus, few people could take out loans, even if they wanted to.

Furthermore, because people didn't have money to spend, firms were also unwilling to borrow, since they already had excess capacity due to their depressed economy. So, at the start of the Great Recession, lower interest rates had a much lesser effect in stimulating the economy, which is why the after effects of the recession lasted so long.

Determinants of the Demand for Money

The primary factors affecting the demand for money are the:

  • inflation rate,
  • price levels,
  • nominal interest rates
  • expectations about interest rates,
  • nominal income,
  • real GDP,
  • transfer costs,
  • faster transfers
  • preferences, and
  • technology.

Inflation may increase or decrease the velocity of money, depending on which factors are more prominent. Low inflation increases demand for money because higher prices requires more money for a given amount of goods and services. But higher inflation also increases the holding costs of money.

For instance, if the inflation rate is 10%, then the cost of holding money is -10%. So when inflation is high, people will either spend it or invest it before the money loses value. This is particularly true in hyperinflation environments. Hence, higher inflation rates increases the velocity of money, which increases inflation even more.

As with inflation, higher price levels will also increase the demand for money.

These 2 graphs show the positive relationship between inflation and the velocity of money. Note that, around 1980, both inflation and money velocity increased rapidly. An increase in the money supply also causes the velocity money to decline, as can be seen from 2008 onward, when the central bank greatly increased the money supply. Source: Federal Reserve and Bureau of Labor Statistics

Because money is used as a means of payment, a higher nominal income tends to increase the amount of money people desire to hold, since wealthier people buy more expensive products and services and have a higher level of expenditures. Because incomes increase with real GDP, the demand for money will also increase with increases in the real GDP.

Higher interest rates reduces the demand for money by increasing the opportunity cost of holding money, which is the interest that could be earned if the money was invested.

So if the interest rate is 5%, then the cost of holding money is the 5% that could have been earned in interest.

Expectations of a higher interest rate will increase the demand for money, since interest-paying securities decline in price when interest rates rise.

The demand for money is inversely related to interest rates.

Preferences may also change with economic conditions. When the economy is good, people tend to hold less money by spending more or investing more. When the economy is declining, people feel more anxious, which increases their demand for money.

This is sometimes called a precautionary demand for money, which is money held for emergency expenses. Since people with higher incomes generally have higher expenses, they tend to hold more money for emergencies. The precautionary demand for money will also be greater with greater uncertainty about the future.

For instance, if you feel insecure about your job, you will tend to hold more money because of increased unemployment risk.

Technology that provides liquidity, such as credit cards, reduces the demand for money, since these payment substitutes provide a means of payment without the need to hold money. wise, lower transfer costs and faster transfers between accounts will lower the demand for money.

Transactions and Portfolio Demand for Money

Money can be spent or invested, so the desire to hold money is to make a future purchase or investment rather than buying or investing now. The main benefit of holding money is that it provides the holder flexibility, so what it is ultimately used for does not matter. Nonetheless, some economists distinguish between the transactions demand for money and the portfolio demand for money.

The transactions demand for money is the demand for money intended to be used for a future purchase. wise, the portfolio demand for money is money held for future investments.

The portfolio demand for money increases with wealth and portfolio risk and decreases with increased portfolio returns, lower risk, or lower opportunity costs. In other words, the portfolio demand for money is influenced by the same factors that influence the demand for bonds.

People with greater wealth want to invest more, since they have most of the goods and services that they want, while higher investment risks will cause people to invest less, since there is a greater chance for loss.

By contrast, greater portfolio returns and reduced risk decreases the demand for money, since there is an opportunity cost of not investing, and vice versa.

For instance, when bonds pay 2% interest or less, people tend to hold more money in their checking accounts, because it is more liquid and the opportunity cost of earning interest from bonds is low. Additionally, the risk from bonds is low, but not 0, so a low interest rate may not compensate for the risk.

If interest rates are high and risks are low, then people will want to invest more. If interest rates are expected to rise in the future, then people will hold more money, because rising interest rates causes the value of bonds and other interest-paying financial instruments to fall in value. Stocks also tend to decline with higher interest rates.

Central Banks Target Interest Rates Rather Than Money Growth to Control Short-Term Inflation

Since the factors that influence the demand for money are difficult to measure directly, central banks use statistics to predict how changes in monetary policy will affect the demand for money.

Nonetheless, because the demand for money and, therefore, the velocity of money, fluctuates considerably over the short term, the link between money supply and inflation is weak over the short term. Hence, by targeting money growth, interest rates fluctuate with the velocity of money.

Because a stable interest rate helps to stabilize the economy, but money growth causes interest rates to fluctuate, central banks target interest rates rather than money growth as a means to control short-term inflation.


Demand for Money — Overview, Types, Speculative Reasons

demand for money

The demand for money is the total amount of money that the population of an economy wants to hold.

The three main reasons to hold money, as opposed to bondsBonds, equity, or other financial asset classes, are as follows:

  • A transactions-relatedreason – People need money on a regular basis to pay bills and finance their discretionary consumption;
  • A precautionaryreason, as an unexpected need can often arise; and
  • A speculativereason if they expect the value of such money to increase versus other asset classes.

Money Held for Transactions

The amount of money held for such a reason is called transaction money balances. Transaction money balances depend on several factors, but mainly:

  • The overall conditions in the economy analyzed. When macroeconomic conditions improve, in the form of higher nominal GDPNominal Gross Domestic Product growth, lower unemployment, or higher salaries, it’s reasonable to assume that spending in the economy will improve. The conditions determine an increase in the demand for money needed to finance the purchase of goods and services.
  • The citizens’ propensity to spend. Regardless of the overall macroeconomic conditions, the citizens of an economy may possess a higher propensity to spend on goods and services than another economy with similar characteristics, which would create, other conditions held equal, higher demand for money.

Money Balances Held for Precautionary Reasons

Precautionary money balances are held to moderate the impact of unexpected spending needs that can occur in the future. The factors that drive the demand for precautionary money balances are similar to those analyzed for transaction money balances.

  • As the level of economic activity and GDP rises, companies and consumers will increase the level of precautionary money balances for unforeseen spending needs. it is a natural consequence of trends, such as increasing consumer spending habits and rising inflationInflation.
  • The availability of credit and level of interest rates affect the level of precautionary money balances. Other conditions held equal, when credit is easily (hardly) available and interest rates are low (high), such money balances are expected to rise (decline).
  • The balances held for precautionary reasons must be consistent with the level of spending of a company, family, or individual. For example, a precautionary balance of $500 would not be enough for a family that is spending $5,000 per month.

Money Held for Speculative Reasons

Money held for speculative reasons is also known as the portfolio demand for money. The money is held to take advantage of speculative opportunities or for covering/offsetting risks in other assets or the economy. There are several cases in which money is used as a speculative instrument:

  • When there is deflationDeflation or when it is expected in the future. If prices decline, the money stored today will be more valuable tomorrow.
  • When conditions in other markets are not favorable and are expected to deteriorate. For example, if the bond market doesn’t offer good returns, investors may prefer holding speculative cash balances to wait for better market conditions. In addition, if the prices of certain assets are expected to go down, investors may increase their cash positions for speculative purposes.
  • When people want to speculate on changes in currency rates. For example, if somebody expects its domestic currency to depreciate significantly against a foreign currency, they can buy the foreign currency and store it and wait for its appreciation against the domestic currency.

Such a practice is often common in some emerging and frontier markets characterized by volatile currency and high inflation, where some people try to store money in U.S. dollars, euros, or other relatively stable currencies for speculative reasons.

Speculative Demand for Money and Asset Prices

We said that speculative demand also depends on the conditions in other markets, such as the bond market and the expectations of returns in those markets.

In general, an investor who chooses to hold money instead of financial instruments, such as bonds, is giving up the return he/she can earn holding such instruments.

That is why:

  • The demand for money tends to increase when the potential returns in other asset classes decline or when the perceived risk of such investments increases.
  • The demand for money tends to decline if the potential returns in other asset classes increase or when the perceived risk of such investments declines.

As a general rule, we can say that there is:

  • A direct relationship between speculative demand for money and returns in other financial assets.
  • An inverse relationship between speculative demand for money and risks in other financial assets.

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™CBCA™ Certification certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:


40 Best Demand Letter Templates (Free Samples) ᐅ TemplateLab

demand for money

A demand letter is an official letter which makes a demand to the recipient. When someone receives such a letter, he also received a legal obligation. The person needs to resolve an issue such as acting on a contract they agreed upon.

You may even give a demand letter for money owed to someone who owes you money. Such demand letter samples can serve as official evidence in court. They can also serve as a solution to a specific dispute.

If you need to settle a problem, you don’t have to send a demand letter immediately. However, if you’ve already spoken to the person but you still haven’t come to a solution, then you can send a letter.

Such letters will help solve the problem in a timely manner. In fact, some courts would require you to have a sample demand letter before proceeding with a case. There may be cases when you’re unable to reach a settlement.

If so, having such document would allow you to present your case before a judge.

You may give the letter personally or send it in the mail. But if the letter comes back to you unopened, then maybe your records are already outdated. The person you’re writing to may have moved or the business may have already closed down.

In such cases, there’s a possibility that the recipient won’t have any liabilities. This is especially true if you’re unable to find the person you’re giving the letter to.

The recipient must officially receive your demand for payment letter. This is important for it to stand-up in court. So if you’re sending it in the mail, you really need to make sure that you have the correct address.

If it comes back to you, try to find out the new address of the recipient. Do this so you can still send your letter.

Types of demand letter templates

Nowadays people aren’t as careful as they used to be. Because of this, a lot of problems arise due to carelessness or forgetfulness. This is the reason why demand letters are very useful. You can use them to ask for what’s rightfully yours in a formal way.

You can use demand letter samples for compensation for damages caused by carelessness. You may even use a demand letter for money owed to ask for payment from a person.

There are different types of templates you can create. You can make a sample demand letter for:

  1. Advance payment
  2. Auto accidents
  3. Extension of payment date
  4. Final demand for payment
  5. Guarantor
  6. Insurance
  7. Legal purposes
  8. Money owed

No matter what the purpose of your letter is, you need to make sure it’s well-thought-out. Think of the wordings carefully. This is especially important if you think it might end up becoming a piece of evidence.

Such letters are official and so you need to structure them well too. If you don’t wish to write it by yourself, you can download a template from here.

Creating the structure for your demand letter template

If you watch the news a lot, you’ll learn that there are a lot of court cases being successfully solved. Because of this, you may want to go straight to court when experiencing a problem with another person.

Unfortunately, this can be very expensive for you. Besides, most times, creating a demand letter should be the very first step to take. For instance, you can make a demand for payment letter if someone owes you money.

Such letters are official documents which you give to a person you have a problem with. In the letter, explain the problem as well as the details of your demands. Do this as a first step to avoid expenses and complications. You may be quite surprised at how effective a simple letter can be.

You don’t have to have a huge problem in order to use a letter to make demands. Such letters are mainly meant to inform the other side that you need what’s due at the soonest possible time.

Such letters are especially beneficial when dealing with payments and money owed. A lot of times, people who owe you money may forget to pay. Either that or they don’t think you’ll do anything if they don’t give back what they borrowed.

In such cases, their thoughts will definitely change. This will happen after you give them a demand letter for money owed. In it, you should list the reasons why you’re asking for the payment already.

In more serious cases, you can even state that unless the person pays at a given date, you’ll go to court.

Giving such a document is important. It will make the person realize that you’re serious about solving the problem. It will make them think about a solution which will benefit you both.

Usually, people will pay up rather than spend more money on lawyers because you sued them in court.

But how do you structure such a letter? If this is your first time to do so, here are some tips to help you out:

  • State your reasons The very first thing you need to write in your letter is your reasons for it. You should state these reasons so the recipient will know what it’s about. It’s best to include a detailed explanation of all the events which led to the issue at hand.This way, you have all the details in writing. So if you end up using the document in court, it will serve as a strong piece of evidence. The judge can use it to understand all the circumstances of your situation.
  • Be professional and polite When you’re writing the letter, keep in mind that you need to stay professional and polite. Even if you’re angry and you have a lot to say, restrain yourself. You don’t want to end up insulting the recipient or making him angry. When this happens, the letter might not work as well. Don’t just let your emotions get the best of you. Instead, use a business tone when writing the letter. If possible, make sure that the recipient sees what will happen if he doesn’t comply. The more transparent you make your letter, the more effective it will be. Also, if you use a polite tone, the recipient won’t feel bad about getting the document. When writing such a letter, don’t use your handwriting. It’s not really professional and your reader might not understand it. Use a typewriter or a computer to compose the letter.Then if you have your own letterhead or stationary, print your document out on that.
  • State your demands Apart from the reasons for your letter, you should also state your demands. Without the demands, your reader might just dismiss the document altogether. This typically happens when there aren’t any specific or detailed requirements included. Write down everything you want in your letter. If you’re asking for payment, give the specific amount. Then give the details on why the recipient needs to pay that much. On the other hand, if you’re demanding that the recipient perform tasks, list them down.All the tasks should be in complete detail to avoid confusion and misunderstandings.
  • Provide an ultimatum or alternative The next thing you should do is to give an ultimatum or an alternative to your recipient. In the case of payments, give your reader a deadline. Or you can provide an alternative in case the recipient won’t be able to accomplish the tasks on time.When you do this, the recipient can either agree to your demands or not. Then you also need to include the consequences. If the reader doesn’t comply, then he would have to face those consequences.

Keep these in mind when writing a demand letter template

Now you have a better idea of what to include in your demand letter sample. But it’s also important to know how to write one. When you’re making a template for your letter, keep these things in mind:

  • Don’t write your letter by hand It’s never a good idea to write your demand letter by hand. If you don’t have a typewriter or computer, look for one. You can borrow one or even rent one in a computer shop. Doing this makes the letter more formal or official for your reader.Also, print it out on a letterhead or your personal stationary to make it legal.
  • Explain all the facts of your situation clearly You may think it’s strange to explain your situation to the reader but it’s essential. It’s extremely important to write everything down. Do this in case you’ll need the document in court.It’s also important to include this so the reader understands your perspective too.
  • Always practice politeness Never use an attacking tone when you’re writing this letter. Sure, it’s called a “demand letter.” But that doesn’t mean that you should have a demanding tone. State the facts simply and professionally.Also, never use threats or other statements which convey anger or frustration.
  • Make your demands clear It’s also crucial to make all your demands clear. Explain the amount you want as payment and the tasks you want the recipient to do. The clarity of this information is vital to the letter. Make sure of it so everyone understands the information in it.
  • Include all the consequences of inaction The consequences of the reader’s inaction are also a vital part of the letter. That’s why you must include this information too. Inform the reader of what will happen when he doesn’t pay or do what you agreed.Usually, the last resort would be to go to court with the case.
  • Make copies of your document When you’re done with your letter proofread it before you send it. Then you can print it out. It’s a good idea to make copies of your document. Do this so that if the recipient doesn’t get it, you can easily produce another copy.After printing the document out, don’t forget to sign it. Then you can either hand it to the person directly or send it in the mail. Either way, you need to make sure that the recipient gets the letter and acknowledges it.

FAQs about demand letters

Demand letter templates are very useful. This is especially true if you want to avoid complicated lawsuits. Such documents are fairly easy to write but they do have a big impact. This is especially true for the recipient of the letter.

Before writing your own demand letter sample, let’s answer some questions about them:

  • When should you write the letter? When you’re planning to file small claims, the first step is to write the letter. It’s a legal way to put into words the situation and all other relevant information. Then you can give the letter to the person you’ve written it for.
  • What should you write in your letter? Write down all the details of the situation to make everything clear. Then write down all the reasons for the letter as well as your demands. After that, include what will happen if the reader doesn’t comply with your demands.These are the most important things to include in your letter to make it official.
  • What should you stay away from when writing the letter? First and foremost, you should stay away from rude and threatening language. Never berate or insult the reader no matter how upset you are. Using impolite or negative language will make the letter less effective.Also, remember that if you end up in court, the judge will read the letter. So if you write negative things, it might sway the decision of the court.
  • How long should your letter be? The fact is, there’s no minimum or maximum length for such letters. But it’s better to make it short and concise. Writing a lengthy letter which has too many words might confuse or bore the reader.In either case, he won’t read the document all the way to the end. That would be such a shame especially if you wrote the letter carefully. Also, remember to make copies of your document in case you need it in the future.


Demand for money

demand for money

The demand for money refers to how much assets individuals wish to hold in the form of money (as opposed to illiquid physical assets.) It is sometimes referred to as liquidity preference. The demand for money is related to income, interest rates and whether people prefer to hold cash(money) or illiquid assets money.

This shows that the demand for money is inversely related to the interest rate.

  • At high-interest rates, people prefer to hold bonds (which give a high-interest payment).
  • When interest rates fall, holding bonds gives a lower return so people prefer to hold cash.

Types of demand for money

  1. Transaction demand – money needed to buy goods – this is related to income.
  2. Precautionary demand – money needed for financial emergencies.
  3. Asset motive/speculative demand – when people wish to hold money rather than buy assets/bonds/risky investment.

Transaction demand for money

Transaction demand for money – the money we need to purchase goods and services in day to day life.

In the classical quantity theory of money. The demand for money is a function of prices and income (assuming the velocity of circulation is stable.) If income rises, demand for money will rise.

In an inventory model, the demand for holding money depends on the frequency of getting paid, and the cost of depositing money in a bank. When employees are paid, they will hold some money to buy goods.

If they are paid once a month, they may deposit half to benefit from interest payments, and then withdraw after two months. However, electronic transfers and debit cards have made this less relevant.

Precautionary demand for money

  • Precautionary demand for money – the money we may need for unexpected purchases or emergencies.

Asset motive

  • The asset motive states that people demand money as a way to hold wealth. This may occur during periods of deflation or periods where investors expect bonds to fall in value.

Speculative demand

Keynes explained the asset motive through what he termed ‘speculative demand’. In this theory, he argued that demand for money is a choice between holding cash and buying bonds.

If interest rates are low, then people will tend to expect rising interest rates, and therefore a fall in the price of bonds. In this case, demand for holding wealth in the form of money will be higher.

If interest rates are high, and people expect interest rates to fall, then there is ly to be greater demand for buying bonds and less demand for holding money. If interest rates fall, then the price of bonds will rise.

The inverse relationship between the price of bonds and bond yields.

Portfolio motive

The portfolio motive is another way of considering the asset motive. This theory was developed by James Tobin. He placed emphasis on the trade off between asset growth and risk aversion.

For example, if an individual is nervous about future economic trends, he will hold money rather than purchase more risky bonds and shares.

If the individual is optimistic, he will take risks and purchase fewer bonds and shares.

Evaluation how stable is demand for money?

The demand for money can vary due to many factors other than income and interest rates. These include

  • Technological changes – e.g. debit cards, make holding cash less important. Easy access to current accounts can enable people to hold less cash.
  • Availability of credit. If credit is more available, precautionary demand for money will fall as individuals feel they can borrow – if they meet short-term difficulties.
  • Irrational behaviour of asset prices. Markets can enter boom and busts driven by psychological factors such as over-exuberance. In these bubble periods, demand for assets will rise and demand for holding money will fall.
  • Empirical evidence in A Monetary History of the United States (1963) Friedman and Schwartz suggested a relationship between demand for money and income and interest rates. However, this relationship seems to break-down post-1975
  • It depends on how you define money. Narrow definitions such as M0 and M1 are quite different from broader definitions. Also, there is near-money which includes short-term gilts with the maturity of fewer than six months.
  • The demand for money can refer to narrow definitions of the money supply (M0, M1) or broad measures of the money supply M3 or M4.

Money demand in a liquidity trap

In a liquidity trap, the demand for money is perfectly elastic. Increasing the money supply doesn’t reduce interest rates and the impact of increasing the money supply is ineffective in boosting demand.



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