Answer to Question #236431 in Macroeconomics for KAT

Question

define money demands describe Friedman's theory of demand for money ?

Answer 1

Demand for money is the desire to hold cash money as opposed to illiquid physical assets or investments. People need to hold money for various reasons as follows:

a. Transaction related. Money needed to pay bills or buy goods

b. Precautionary reason, so as to cater for emergencies.

c. Speculative reason. In order to take advantage of any arising opportunities

Friedman's theory of demand for money regards the amount of cash held by an individual as a commodity which is demanded since it yields services to the person holding it. It further states that demand for money is part of the wealth theory. According to Friedman income is an indication of wealth.

Friedman believes that wealth can be held in five different ways that is, money (M), bonds (B), equities ( E), physical nonhuman goods(G) and human human capital (H).