How does an increase in the demand for money due to the transaction motive influence the effectiveness of monetary policy tools such as interest rate adjustments, particularly when comparing currency and deposits?

When people want to hold more money for everyday purchases, this is called the transaction motive for money demand. If demand for money increases, it can affect how well monetary policy works, especially when central banks change interest rates. For example, if the central bank raises interest rates to encourage saving, people might still want to hold cash for transactions, which could reduce the impact of that policy. This is because higher interest rates can make saving money in banks more attractive, but if people prefer cash for spending, they may not respond as expected. Thus, the balance between holding cash and making deposits can influence how effective these interest rate changes are in managing the economy.