People may demand money for different purposes. Some may demand money to buy goods, some may want to save money in bank where as some may want to invest money in share market. In general there are 03 types of demand for money namely:
Transaction Demand
Transaction demand for money money means holding money to pay for goods and services. During the era where there was bater system there was no transaction demand for money as people did not use money to buy goods and services instead they exchange goods for another good in return. Transaction demand for money is the most common demand for money as each an everyone live in the modern world demand money to pay for goods and services they consume. Money kept in wallet of a person can used for transaction demand for money. But in modern era with increased usage of electronic money such as debit cards and credit cards there is less amount of notes and coins are used in transactions.
Precautionary Demand
People foresee uncertainties into the future and tend to save money meet unexpected expenses. In other words people tend to save part of their money to be used at unexpected tragedies in their lives and money saved to meet those uncertainties is called precautionary demand for money. (People foresee uncertainties and as a precautionary measure they save money for future use) One can say money saved in a saving account represents a precautionary demand for money as people save money in savings accounts to be used at emergencies such as to settle medical bills.
Speculative Demand
Speculative demand for money arises when there people hold money to purchase assets. In other words holding money to make investments is called speculative demand for money. The decision to make investments in interest bearing/non interest bearing assets depends on the opportunity cost and the rate of return earned by the investment. If the rate of return is high and opportunity cost is low there will be high demand for precautionary motive for money and vice versa. In other words if the people speculate about the rate of return into the future and they purchase assets and for those speculative measures money is demanded.
When all 03 types of demand for money is added up the total demand for money in the economy is calculated which is called Liquidity Preference. (Refer the Article of Liquidity Preference)
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