(a) Define money. [2 marks] (b) State the three motives for holding money. [6 marks] (c) Mention two determinants each of the motives for holding money. [12...

Answer Details

(a) Money is anything that is generally accepted as a medium of exchange and in the final settlement of debts.

(b) The three motives for holding money (as identified by J. M. Keynes):

• The transactionary (transactions) motive: holding money to meet day-to-day purchases and expenses.
• The precautionary motive: holding money to meet unforeseen or emergency expenses.
• The speculative motive: holding money to take advantage of expected changes in the price of bonds or other assets, that is, to speculate.

(c) Two determinants of each motive

• Transactionary motive: the level of the individual's or nation's income, and the interval or frequency of receiving income and making payments (also the general price level).
• Precautionary motive: the level of income, and the degree of uncertainty about the future together with the person's temperament or foresight.
• Speculative motive: the current rate of interest (bond prices), and people's expectations about future interest rates and bond prices.

In general, the transactionary and precautionary balances depend mainly on income, while the speculative balance depends chiefly on the rate of interest.