CBSE Class 12-commerce Answered

People prefer to hold money in liquid form to meet their daily expenses because there is a time gap between the receipt of income and expenditure. Income is received periodically, whereas it is spent on goods and services regularly as and when need arises. The transaction demand for money is directly related to the level of income; assuming that the prices are to remain constant. Therefore, demand for money implies demand for real cash balance and income refers to real income. People know the amount of money which they require for transacting their planned expenditure. The higher the level of income, the higher the demand for money. The proportion of income held for transaction motive is constant in the short run. It implies that given the income and its distribution, the relationship between income and transaction demand for money can be specified as

M_t = k Y

Where, k denotes a constant proportion of income demanded for transaction purpose.

Here, the money demanded for planned and committed transactions is interest inelastic because whatever the rate of interest, people cannot stop paying house rent, school fees, electricity bill and grocery bill.