Theory question 105
Money and Inflation(a) Define money.
(b) State the three motives for holding money.
(c) Mention two determinants of each of the motives for holding money.
Show the model answer
Model answer
(a) Money is anything that is generally acceptable as a medium of exchange and in settlement of debts.
(b) Transactions motive; precautionary motive; speculative motive.
(c) Transactions: level of income; frequency of payment of income; price level; habits of spending.
Precautionary: level of income; uncertainty about the future (emergencies); availability of credit; age and family size.
Speculative: rate of interest; expectations about future bond prices/interest rates; level of wealth.
Explanation
Two determinants for each of the three motives.