Introduction
Both transaction demand and asset demand refer to an essential sum that a person or business has to possess. However, they differ in the purpose of having money on balance. Transaction demand is the entirety of money that a certain organization of individual needs for completing transactions. Asset demand for money is the money required to purchase financial resources. As a result, transaction demand presupposes a larger sum, since purchasing assets is possible through transactions.
Discussion
Aggregate income is an indicator of the economy’s ability to accumulate income before it is reduced by inflation, taxes, and other adjustments. Interest rate determines the amount of money in circulation – high rates mean that the purchasing power of money increases due to the deficit of money, which also causes price levels to fall. Meanwhile, low interest rate allow for the large surplus of money in the economy, which causes inflation and leads to increasing price levels. The first example of transaction demand for money as well as asset demand can be seen in the field of cryptocurrencies. In order to sustain transaction volumes, all cryptocurrencies need a high amount of available money – a transaction demand. Meanwhile, asset demand is represented by the ability of crypto assets to generate profit, requiring the availability of money, which can be used to pay for them (Ciaian & Rajcaniova, 2018).
The second example of transaction demand for money can be seen in the increasing prevalence of electronic payments – such transactions require money, which are not in the form of cash (Pietrucha & Maciejewski, 2020).
Conclusion
Finally, asset demand can be observed in the necessity to have electronic money on the stock exchange to be able to buy stocks and bonds.
References
Ciaian, P., & Rajcaniova, M. (2018). Virtual relationships: Short-and long-run evidence from BitCoin and altcoin markets. Journal of International Financial Markets, Institutions and Money, 52, 173-195. Web.
Pietrucha, J., & Maciejewski, G. (2020). Precautionary demand for cash and perceived risk of electronic payments. Sustainability, 12(19), 1-25. Web.