The aggregate or the total demand for money in the economy is equal to the sum total of money held under each one of the above mentioned motives, viz., the transaction motive, the precautionary motive and the speculative motive. In other words,
M = M1 + M2
Where M is the aggregate demand for money at any point of time M1 is the money held by the community for transaction and precautionary purpose and M2 is the demand for money kept for the purpose of speculating in the securities. By adding M1 and M2 at the various rates of interest we find out the total demand for money, as shown in the table.
|Rate of Interest R(%)||Transaction and Precautionary Demand M1||Speculative Demand M2||Total or Aggregate Demand M|
As we know, the transaction and precautionary demand for money (M1) is determined by the level of income. So, if the income remains unchanged, the amount of money held for transaction and precautionary purpose remains constant whether the rate of interest is high or low. But the speculative demand for money is sensitive to the change in the interest rates. At high rates of interest the speculative demand for money is small, while it becomes large at lower rates of interest and it becomes almost infinite at very low interest rates, say, below 2 per cent. Since, one component of aggregate demand, viz., (M1) remains constant and the other component, viz., M2 is small at high rate of interest and large at low rates of interest, the total demand for money, viz., M also remains small at high interest rates and becomes large at low interest rates.SUBMIT ASSIGNMENT NOW!