What is money? Why do people prefer to hold money?
Explanation
(a)Money is any commodity that is generally accepted as a means of payments for goods and services.
(b) Reasons for holding money are:
(i) Transactionary motives: People desire to keep or hold money for day to day transactions or current expenditures. Households need to hold money in order to cater for the interval between the receipt of incomes and their expenditures.
(ii) Precautionary motives: This is when people demand for money in order to meet up with unforeseen circumstances or unexpected expenditures. These may include sickness, unexpected visitors etc. Due to uncertainties in life, people keep money against future emergencies that may require monetary expenditures.
(iii) Speculative motives: This motive is specifically a business motive and refers to the desire to hold cash balances in order to embark on speculative dealings in the bond market. The demand to hold money for speculative purposes is interest elastic.