What is transaction demand for money? How is it related to the value of transactions over a specified period of time?
Transaction demand for money is the amount of money required for current or day to day transactions. It is that quantity of money which all the individuals and firms desire to keep in their hand for the purpose of financing their forthcoming expenditure.
There are two motives of holding transaction money - income motive and business motive. Income motive is from the perspective of consumers who want money to meet household expenditure. Business motive is from the perspective of businessman who needs money to carry on their business activities.
The relation between transaction demand for money and value of transactions over a unit period of time is symbolised by
MDT = KT
1/K MDT = T
1/K = v = velocity of circulation of money
v MDT = T
T = Total value of transactions in the economy over a period of time
K is a positive fraction
MDT = Stock of money people are willing to hold at a particular point of time.
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