Keynes's money demand function is: in the formula, the total money demand refers to the money demand determined by transactional motivation and preventive motivation, which is the income level and the function of income level; It refers to the demand for money based on speculative motives, which is interest rate and a function of interest rate.
The meaning of Keynes's money demand theory is that people's money demand behavior is determined by three motives, namely, trading motivation, prevention motivation and speculation motivation. Dividing the total demand for money into the demand for money with various motives is the main performance of Keynes's money demand theory's breakthrough in the analysis method to the traditional theory.
The monetary demand determined by trading motivation and preventive motivation depends on income level. Keynes believed that the trading medium is a very important function of money, and there is a stable relationship between the money demand of the trading medium and the income level, that is, the money demand of the trading motive is a stable positive function of the income level.
The more income, the greater the demand for this currency; The less income, the smaller the demand for money. People's demand for money depends not only on the trading motivation, but also on the "preventive motivation", that is, the motivation to hold money to deal with unexpected expenses that may be encountered. Money demand determined by trading motives and preventive motives is not very sensitive to changes in interest rates.
Money demand based on speculative motives depends on the interest rate level. The money demand of speculative motivation refers to a certain amount of money held by people in order to carry out speculative activities at an appropriate time in the future. The most typical speculative activity here is buying and selling bonds, because Keynes divided assets into money and bonds, with money having no income and bonds having income but fluctuating prices.
The monetary demand of speculative motivation depends on three factors: the current interest rate level, the normal interest rate level in the eyes of speculators and the speculators' expectation of the future interest rate trend. If there are many speculators in the whole economy,
Moreover, the wealth owned by each speculator is insignificant to the total wealth of all speculators, so the money demand for speculative motives becomes a decreasing function of the current interest rate level. It can be seen that there is a negative correlation between speculative money demand and interest rate.
Regarding the relationship between interest rate and money demand, Keynes made progress in the study of special circumstances and put forward the famous "liquidity trap" hypothesis. When the interest rate level in a certain period can't be lower, people will expect that interest rates will rise, bond prices will fall, and the elasticity of money demand will become infinite. That is to say, no matter how much money is added, it will be stored by people.