Theory question 106
Money and Inflation(a) What is money?
(b) Explain the following concepts: (i) value of money; (ii) demand for money.
(c) Identify any four determinants of transactions demand for money.
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(a) Money is anything generally acceptable as a medium of exchange and in settlement of debts.
(b)(i) Value of money: its purchasing power, the quantity of goods and services a unit of money can buy; it moves opposite to the general price level.
(ii) Demand for money: the desire to hold money in cash (liquidity preference) rather than other assets, for transactions, precautionary and speculative motives.
(c) Any four: level of income; frequency/interval of income payments; general price level; habits and spending patterns; size of family; availability of credit; level of economic activity.
Transactions demand depends mostly on income and how often it is paid.