The three motives of
Explanation of Solution
People hold money mainly for transaction purpose, precautionary purpose, and speculative purpose. The amount of holding money depends not only on the rate of interest but also on the price. Demand for money and interest rate are inversely related because when the rate of interest increases, the
Option (a):
The demand for money for the purpose of three motives (transaction motive, precautionary motive, and speculative motive) is positively related with the income. When the income level increases, the transaction demand for money, precautionary demand for money, and speculative demand for money also increase and vice versa.
Option (b):
The demand for money for transaction motive and precautionary motive is positively related with the interest rate. Speculative motive is negatively related with the interest rate. The purchase of bonds and other assets are related with the transaction motive. Thus, decreasing the interest rate on bonds and other assets leads to reduce the demand for money to spend on (purchase) bonds and other assets.
Option (c):
When an automated teller machine is installed near a person, the demand for holding money for transaction and precautionary motive decreases because money is available at any time and hence, there is no necessity to keep money and also, the person gets an amount of interest.
Option (d):
Demand for money and
Option (e):
People always hold money mainly for transaction motive, precautionary motive, and speculative motive. When a person gets income on weekly basis instead of monthly basis, then it is not necessary to keep more money. Thus, the transaction demand for money and precautionary demand for money decrease.
Demand for money: Demand for money refers to the amount of money that households and firms desire to hold at different nominal interest rates.
Opportunity cost: Opportunity cost refers to the benefits given up in the process of obtaining some other benefits.
Transaction demand for money: Transaction demand for money is the holding of money to meet the everyday expenses of a person.
Precautionary demand for money: Precautionary demand for money is the amount of money held by a person for contingency purpose.
Speculative demand for money: Speculative demand for money is the money held by people to take advantage from change in the price of bonds and other assets.
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Chapter 16 Solutions
Macroeconomics for Today (MindTap Course List)
- 20. Factors 01 pro B. the technological innovations available to companies. A. the laws that regulate manufacturers. C. the resources used to create output D. the waste left over after goods are produced. 21. Table 1.1 shows the tradeoff between different combinations of missile production and home construction, ceteris paribus. Complete the table by calculating the required opportunity costs for both missiles and houses. Then answer the indicated question(s). Combination Number of houses Opportunity cost of houses in Number of missiles terms of missiles J 0 4 K 10,000 3 L 17,000 2 1 M 21,000 0 N 23,000 Opportunity cost of missiles in terms of houses Tutorials-Principles of Economics m health carearrow_forwardIn a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending ______ Group of answer choices Raises the interest rate so that net exports must fall to maintain equilibrium in the goods market. Cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market. Cannot change the interest rate so income must rise to maintain equilibrium in the money market Raises the interest rate, so that income must rise to maintain equilibrium in the money market.arrow_forwardSuppose a country with a fixed exchange rate decides to implement a devaluation of its currency and commits to maintaining the new fixed parity. This implies (A) ______________ in the demand for its goods and a monetary (B) _______________. Group of answer choices (A) expansion ; (B) contraction (A) contraction ; (B) expansion (A) expansion ; (B) expansion (A) contraction ; (B) contractionarrow_forward
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Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
