Table of Contents


Money Supply:

Supply of money means volume of money held by the people of the country which includes individuals and business hours. It is the aggregate stock of domestic money held by the public.

Money supply is both a stock concept as well as flow concept. If we look at the volume of money supply at a particular point of time, then it is a stock concept. However, when we consider the amount of money over a period of time, then it is a flow concept.


Demand for Money:

Demand for money arises because money can be put to several uses. Demand for money doesn’t mean the amount of money people own to hold.


There are two distinct approaches to the concept of demand for money: -


1. Classical Approach –

  1. JS Mill, Fisher, David Hume and AC Pigou are the economist who popularised the classical approach to the concept of money.
  2. Money is only a medium of exchange and people demand money for transaction purposes.
  3. In their opinion demand for money arises because it helps in smooth transaction of goods and services.


2. Keynesian Approach –

  1. It is a modern concept.
  2. It is also called as cash balance approach.
  3. J.M. Keynes popularised this concept in his book “The General Theory of Employment, Interest and Money”, published in 1936.
  4. According to Keynes, demand for money arises because people want to hold money or liquid for 3 main purposes: -

a. Transaction Purposes – money is most important medium of exchange. Hence, people demand money as it is useful in carrying out trade, transaction and business activities in the country. The day to day transactions are influenced by the amount of ready cash available.

Demand for money depends on –

  1. Level of money
  2. Periodic interval at which income is received
  3. Level of business activities
  4. Existing method of payment


b. Precautionary Demand – it means that people like to hold money to meet certain unforeseen and unexpected expenditure. People like to take precautions against certain liquidity and unforeseen expenses like accidents, sickness, hospitalisation etc.

The precautionary demand for money depends on –

  1. Level of oncome
  2. Desire for future security
  3. Nature of business activities
  4. Availability of credits
  5. Rate of interest offered by commercial values


c. Spectacular Demand – it is the desire of the people to hold resources in liquid form to take advantage of market movements. It refers to the desire of people to hold cash in anticipation of earning profits in future.

According to Keynes, “people hold cash anticipating future changes in prices.” This technique is commonly observed in stock exchange market.

The spectacular demand for money depends on –

  1. Rate of Interest
  2. Number of spectaculars
  3. Stock Exchange Market
  4. Investment opportunity