Question

Identify the motive for holding money in the following scenario.

Joneas recently moved from a comission-based sales job which his income flucated somewhat unpredicately from on month to the next to a salary-based management position where he recevies a fixed paycheck each month. His newfound income stability causes him to lower the amount of money he keeps in a sacings account to guard against a sudden drop in income. This is an example of a decrease in Jonas's (precautionary/speculative/transactions) demand for money.

Complete the following statement about the relationship between the interest rate and speculative balances.

As the interest rate RISES, the opportuninty cost of holding money rises/falls), and people (increase/decrease) their speculative balances.

Answer 1

Precautionary demand for money

Step-by-step explanation:

There are three reasons for holding money. They include;

1. Transaction Motive: This refers to the money held by individual or firms in order to finance their day to day transactions. This kind of money is used to fund daily expenditures of individuals and firms.

2. Precautionary Motive: The precautionary motive refers to the tendency of an individual or firms to hold cash in order to meet the unforeseen circumstances. This is Joneas motive of holding money again a sudden drop in income in the future. He isn't sure if his income will drop or increase but he still saves for unforseen circumstances.

3. Speculative Motive: This motive of holding money by individuals and firms is to ensure they have resources to take advantage of future business opportunities.

As the interest rate RISES, the opportuninty cost of holding money rises and people increase their speculative balances.