Demand for money or liquidity preference

      The demand for money is the desire to hold money in liquid form rather than investing it in goods. Illiquid money is interest bearing securities such as savings deposits, treasury bills, shares, stocks and bonds amongst others. Money in liquid form is made up of coins, banknotes and demand deposits with the banks.

 Motives for the Demand for Money

             According to J.M Keynes, there are three motives or reasons why people demand money or wish to hold money in liquid rather than in illiquid form.

They are described as the components of demand for money and they include;

1. Transaction motive:

            People need to hold money in order to buy their numerous daily consumer goods and services while producers equally wish to hold money in liquid form in order to buy the necessary raw materials and factor services needed for production. All of this makes up the transaction motive for money. In other words, this is money needed to take care of the day to day transaction by individuals, household firms and the government.

2. Precautionary motive:

            Money is also held for precautionary purposes. This is to guard against unexpected or unforeseen eventualities such as a breakdown of a car, burning of a house, accidents, unpredicted opportunities to buy at advantageous terms, falling ill etc. Simply puts, this is the desire for people to hold money for unforeseen circumstances.

           Money held for both transaction and precautionary motives according to Keynes is called active balance. The active balance is interest inelastic

Factors influencing ACTIVE BALANCE

1. The level of consumers income: The higher the level of consumers' income, the higher the demand for money for transaction and precautionary motive
2. The spending habit of the consumers: This refers to the way consumers spend their money. When people value consumption more than saving, they are more likely to hold a greater portion of the income in liquid form and vice versa.
3. The duration of pay period: The shorter the pay period, the smaller will be the amount of money required for daily transaction purposes and unforeseen circumstances and vice versa.
4. The development of near money and money substitute: An increase in the demand for near money and money substitute reduces money nr active balance. That is in countries where the banking system is well developed and cheques are accepted in payment for goods and services, the demand for active balances will be low and high in countries with poor banking and cheque system.
5. Expectation of future change in prices: If prices as expected to fall in future then the demand for money for transaction and precautionary motive will fall and vice versa.
6.  Availability of credit facilities: If there is an easy access to credit facilities then the demand for active balance reduces and vice versa
7. Family size: When family size is large more money will be demanded for active balance motive and vice versa

3. Speculative motive

           The desire to hold money for speculative purposes is derived from money's function as a store of value. People need money for speculative motive because of speculative gains. It is the desire to hold money to embark on speculative dealings.

According to Keynes, the main factor that influences the speculative demand for money is changes in the rate of interest. This is because Prices of share may either rise or fall. If prices are expected to rise in future they may hold less money because they will buy more to sell when the prices will rise and vice versa.

                            Money held for speculative motive is called 'idle balance'. Thus, he argued that the total demand for money is a combination of idle and active balances.

• Demand for money = precautionary + transaction + speculative
• Demand for money = Active balance + idle balance
• Active balance = Precautionary + transaction
• Idle demand = speculative motive

Supply for money

       Supply of money is the total amount of money in circulation in a country within a given period of time. The total supply of money in circulation is made up of coins, bank notes (paper money), bank deposits, near money or quasi money-Money supply can be specified in a variety of ways. For example, a narrow definition of money supply will simply be the total amount of bank notes and coins (currency) in circulation in an economy held predominantly for spending.

• Coins: A coin is a shaped piece of metal with some authoritative imprints which gives it value.

There are eight denominations of coins in Cameroon ranging from 1F, 2F, 5F, 10F, 25F, 50F, 1OOF and 500F. There are two types of coins namely token coins and standard coins.

• Token coin is that coin where the face value is greater than the intrinsic value.
• Standard coin is that coin where the face value is equal to the intrinsic value of the coin.

• Bank Notes: A bank note is an authoritative paper with the state signatures compelling any person to accept as a medium of exchange or for settlement of debt. It is also called Paper Money.

There are five denominations of bank notes in Cameroon ranging from 500F, 1000F, 2 000F, 5 000F and 10 000F. The total amount of coins and bank notes is called currency.

                    Note that there are other broader definitions of money supply and this depends on the monetary authorities. The supply of money is determined by the central bank of each country and the total value in circulation depends on which definition of money supply is adopted.

Bank deposits: bank deposit money kept in the bank in the form of notes and coins and which can be withdrawn at any time with the use of cheques.

Representative money or Quasi money: it is anything which performs the function of money but technically it is not money because people are not forced by law to accept it as a medium of exchange e. g. cheques, postal mandate and bill of exchange.