Question

Match the correct motive (Precautionary, Speculative, or Transactions) for holding money to the following definitions.

Answer 1

Answer: Please refer to explanation

Explanation:

1.

The stock of money people hold to pay unpredictable expenses. Precautionary Motive

The stock of money people hold to take advantage of future changes in the prices of financial assets other than money. Speculative Motive

The stock of money people hold to pay everyday predictable expenses. Transactionary Motive.

2. This is an example of a decrease in Daesun's Transactionary demand for money.

Paying rent is a predictable everyday expense so it is Transactionary.

3. As the interest rate falls, the opportunity cost of holding money falls , and people increase their speculative balances.

The Opportunity cost of holding money falls because people will not be gaining such a high rate of return if they invest due to the lower interest rates so they can hold money with little repercussions. They will increase Speculative balances though to tak advantage when the rates go back up.