Chapter 14, Problem 1CQ

To determine

Explain the reason for holding money and change in the interest influence on holding money.

Explanation of Solution

Money is considered as the medium of exchange for goods and services. The important reasons for people holding money are for precautionary motive, transaction motive, and the speculative motive. In the money market, there is an inverse relationship that occurs between the interest rate and quantity demand for money. When other things remain constant, a high-interest rate will cause to increase the opportunity cost of holding money, and people decrease their speculative equilibrium.  Therefore, if the interest rate increases, people will hold less amount of money.

Economics Concept Introduction

Transaction motive: The transaction motive explains that people hold money to meet their day-to-day expenses is referred to as transaction motive.

Precautionary motive: The precautionary motive explains that people demand money as a safeguard against an uncertain future, such as medical bills, accidents, immediate payments, and so on.

Speculative motive: The speculative motive explains that people hold money to take advantage of unexpected opportunities; for example, gambling.