Of course, if prices and nominal GDP double,
the transactions demand for money will double.
Now, the second major determinant of the demand for money,
is the asset demand motive,
or so-called, speculative motive.
This arises because people use money as a store of value.
As an example of the asset demand for money,
suppose you are interested in investing in some stocks.
But further suppose that after doing some research,
you decide that at present,
the prices of the stocks you want to buy are too high.
In this case, you might decide to hold on to
some cash rather than invest in the stocks now.
But, you are holding the cash so you can be ready to
buy the stocks when the prices become more attractive.
In other words, you are intelligently
speculative that a better financial opportunity will appear soon,
in the form of lower stock prices.
Note, however, that while money is an asset,
money provides no rate of return or interest,
and other assets, such as,
stocks or savings accounts do.
Now, here's the key point.
When you hold money,
its value can depreciate because inflation can erode its purchasing power.
And that key point leads to this key concept.
There is an opportunity cost to holding money that comes in two forms.
First, here is the aforementioned loss of purchasing
power when you hold money that arises because of inflation.
Second, there is the interest rate or rate of return
that you could have earned buying a bond or investing your money in a stock.
So, here's the fun question.
What do you think will happen to the asset demand for money if interest rates rise?
And what do you think will happen to
the asset demand for money if the expectation of inflation falls?
Please jot down your answers now to both of
these questions before moving on to the final words of this module.