DEMAND FOR MONEY/LIQUIDITY PREFERENCE
It refers to the tendency of an individual or general public to hold onto money instead of spending it.

a.) The transaction motive
This is a situation where one holds money with a motive of meeting daily expenses such as buying food, paying for transport costs and entertainment. Thus, one has to ensure that s/he has enough money to cater for these needs. Factors that influence the amount of money held for this motive include:

(i) Individual's level of income. The more a person's income is, the more money s/he is likely to hold.

(ii) Interval between receipts of incomes. The longer the interval between the receipt of money and the next one, the more money is expected to be kept for transaction motives.

(ii) Individual's spending habits. The amount of money held for transaction motive will also depend on the lifestyle of the individual.

(iii) Price of commodities. Where the prices of commodities are high, consumers tend to hold a lot of money as opposed to when prices are low.

(iv) Availability of credit. This depends on whether credit facilities are available or not. Thus, people who are assured of short term credit facility hold little amount of money for daily transactions while people without access to credit facilities hold comparatively more money in order to finance their daily activities. The transaction motive is divided into two i.e

• Business motive- is where money is held to meet business recurring needs e.g paying wages, postage, raw materials and travelling.
• Income motive- is holding money to spend on personal/family needs.
  

b.) The precautionary Motive
This is where people tend to hold money to meet expenses that might occur unexpectedly such as sickness, accidents or loss of property through theft.

Factors that influence the amount of money held for this motive are:

(i) Level of income. The higher the income, the more money one is likely to hold for precautionary motive.

(ii) Family status. High class families tend to hold money for precautionary motive as opposed to low class families.

(iii) Age of the individual. The aged usually have more uncertainities than the young hence they tend to hold more money for precautionary motive than the young.

(iv) Number of dependants. The more the dependants one has, the more is the money s/he is likely to hold for unexpected risks.

(v) Individual's temperament. A person who is optimistic in life assumes that nothing will go wrong in the future and will therefore keep little money as opposed to a pessimistic person who assumes that many things will go wrong hence tends to keep a lot of money.

(vi) Duration between incomes. People who earn money after a short interval are likely to keep less money to take care of unexpected risks than those who earn money after a long interval.

c.) The speculative Motive
Money can be held to be used in the future especially when people anticipate that the prices of goods and services will be lower than they are presently.

Factors that influence the amount of money held for this motive are:

(i) Levels of income.

(ii) Individual's temperament i.e how optimistic or pessimistic people are about future happenings.

SUPPLY OF MONEY
Supply of money therefore refers to the stock of monetary items that are in circulation in an economy at a particular time. These items include:

(a) Total currency: These are the notes and coins issued by the Central Bank.

(b) Total demand deposits. These are the deposits by individuals and firms in commercial banks that are withdrawable on demand.

NOTE: An increase in money supply would be as a result of either increased issue of currency by the Central Bank or increased credit by commercial banks.