Theory question 107
Money and InflationSection B: answer three questions only from this section.
What is money? Why do people prefer to hold money?
Show the model answer
Model answer
Money is anything generally acceptable as a medium of exchange and for settling debts
People hold money (liquidity preference) for three motives:
Transactions motive: to pay for day-to-day purchases between pay days; depends mainly on income
Precautionary motive: to meet unforeseen expenses such as illness, accidents or job loss
Speculative motive: to take advantage of expected changes in the prices of bonds/securities and interest rates; people hold more cash when they expect security prices to fall
Explanation
Define money, then explain the three Keynesian motives.