Whether the demand for money has elasticity of one or more or less than one is a controversial matter.

The classical economists thought that money has a unit elasticity of demand. This means that a change in its value causes a changes in demand in inverse e proportion. if the value of money falls, or in other words, the general price level rises, the demand for money will expand in exact preparation to the rise in prices. The community will require a proportionately larger amount of money to carry out the same volume of transactions as before. As a store of value, a proportionately large volume of money will be required to give the economy command over the same amount of real resources as before. In the case of a rise in the value of money, the demand for money will fall in the same proportion.

That the demand curve for money is unitary-elastic ma be explained in another way. The total amount of money held by the community must always be equal to the tota quantity of money in existence, or its supply. An increase in the supply of money will cause a rise in prices. If it is assumed that the rise in prices is proportionate to the increase in supply, it means that the money held by the community has increased in the same proportion as the rise in prices. The reverse will happen when the supply of money is reduced and prices fall in an equal proportion. Thus, the demand for money may be considered as having an elasticity of one.

The above view about the elasticity of demand for money assumes that the total output in the economy remains unchanged and the demand for real balances is unaltered when there is a change in the supply of money. The assumption is, however, not valid under all conditions. An increase in the supply of money causes prices to rise but not necessarily in the same proportion. There is often an increase in output also and prices may rise only less than proportionately. in other words, the rise in prices is accompanied by a more than proportionate increase in the community’s money balances. Thus, the elasticity of demand for money may be more than unity.

There are also circumstances in which rising prices or falling value of money makes money a rather bad asset. The demand for money to hold may, therefore, increase but only less than proportionately. In such conditions, money has an elasticity of demand of less than unity. This happens in the acute stages of inflation. On account of the rapidly rising prices people are inclined to spend their money almost as quickly as they acquire it and a situation called ‘flight from money’ develops. Money being a bad store of value is substituted by real wealth for asset purposes and the demand for money rises much less rapidly  than a fall in its value.
Thus, the demand for money seldom has unit elasticity. The elasticity is more than unity or less than unity, depending upon circumstances created by the changing value of money.

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