Question

How is transaction demand for money related to the value of transactions over a specified period of time?

Answer 1

The relationship between the value of transactions and transaction demand for money can be explained as:

The transaction demand for money in an economy `(M_T^d)` can be written as

`M_T^d = KT`

Or, `1/KM_T^d = T`

Where,

`v = 1/K,` represents the velocity of circulation of money.

T = Total value of transactions in the economy over a period of time

K is a positive fraction.

`M_T^d = `Stock of money people are willing to hold at a particular point of time.

The transaction demand for money is positively related to the total value of transactions and negatively related to the velocity with which money is circulated.