Question

5. The motives for holding money Aa Aa Match the correct motive for holding money to the following definitions. Motive Definition The stock of money people hold to pay everyday predictable expenses Transactions demand for money The stock of money people hold to take advantage of future changes in Speculative demand for money the price of non-money financial assets The stock of money people hold to pay unpredictable expenses Precautionary demand for moey Identify the motive for holding money in the following scenario. Darnell recently moved from a commission-based sales job in which his income fluctuated somewhat unpredictably from one month to the next to a salary-based management position where he receives fixed pay each month. His newfound income stability causes him to lower the amount of money he keeps in a savings account to guard against a sudden drop in income. This is an example of a decrease in Darnell's transactions demand for money Complete the following statement about the relationship between the interest rate and speculative balances As the interest rate falls, the opportunity cost of holding money risesand people decrease their speculative balances.

Answer 1

(1)

(a) Stock of money people hold for everyday expenses - Transactions demand for money

(b) Stock of money people hold to take advantage of future price change of financial asset - Speculative demand for money

(c) Stock of money people hold for unpredictable expenses - Precautionary demand for money

(2)

This is example of precautionary demand for money (since money is being held to offset a decrease in income, to meet exigencies).

(3)

As interest rate falls, opportunity cost of holding money (which is equal to interest rate) falls, and people increase speculative balances.