It refers to demand for conducting day-to-transactions. This motive can be looked at from the perspective of consumers, who want income to meet their household expenditure(income motive) and from the perspective of businessmen, who require money to carry on their business activities (business motive). The transaction motive relates to demand for money to meet the current transactions of individuals and business units.
The relationship between the value of transactions and transaction demand for money can be explained as:
The transaction demand for money in an economy(MDT) can be written as:
MDT = KT
or, 1/K(MDT) = T
or, vMDT = T
Where,
v = 1/K, represents velocity of circulation of money
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.
The transaction demand for money is positively related to the total value of transactions and negatively related to the velocity with which money is circulated.
