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The Reasons for Believing that Transactions Demand for Money May Be Interest Elastic - Coursework Example

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This coursework called "The Reasons for Believing that Transactions Demand for Money May Be Interest Elastic" describes the relationship between the interest and the transactions demand money. This paper provides information that the strong and relationship between these two aspects is the main reason due to which the people use to believe that the transactions demand for money is interest elastic. …
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The Reasons for Believing that Transactions Demand for Money May Be Interest Elastic
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Download file to see previous pages The Transactional demand is basically to hold money in a noninterest bearing form with the intention to make day to day transactions (Robert, p2, 2007). While focusing specifically on the transactions demand of money, this paper is aimed at examining the relationship between the interest rate and money demand in the context of a general assumption held by the financial experts that the transactions demand money may be interested elastic. In this regard, the issues related to the interest elasticity of transactions demand for money are discussed to have a deep understanding of the issue.
In order to find out the evidence about the interest elasticity of the transactions demand for money, it is imperative to have a deep understanding of the concept of transactions demand money and its relationship with interest rate within a market. The transactions demand money could be denoted by M or Lt that refers to the volume of money that is required to meet the financial expenditures. The equation of exchange is a crucial element for the transactions that demand money. According to the equation of exchange M * v = P * Y. In this equation the Lt or M stands for the transactions demand for money, v is the velocity of the money, P refers to the GDP deflator whereas Y represents the real income.
The relationship between the transactions demands money and the interest rate possesses great importance from the perspective that states that there is pressure to economize on one’s transactional case balance and this pressure is originated from the rate of interest. The holders of the transactions money used to buy bonds and also pay fees and brokerage services and as a result, they expect a high return on their money due to interest rate. In a market the higher is the interest, the more people get as a final return for their money. Due to this reason, most of the households use the transaction money to get benefit from the high rates of interest and for this purpose, they make investments in bonds, etc. (Nouriel Backus, p6, 1998) ...Download file to see next pagesRead More
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