Theory question 110
Money and InflationExplain (a)(i) supply of money (ii) value of money
(b) Highlight the three motives for holding money.
Show the model answer
Model answer
(a)(i) Supply of money: the total stock of money in circulation in an economy at a given time, i.e. currency with the public plus bank deposits.
(ii) Value of money: the purchasing power of money, the quantity of goods and services a unit of money can buy; it moves inversely with the general price level.
(b) Transactions motive (day-to-day spending); precautionary motive (for emergencies); speculative motive (to take advantage of changes in interest rates and bond prices).
Explanation
These are Keynes's three motives for liquidity preference.