Question

1. Explain why people demand for money and how demand for money would have been influenced by Covid-19 epidemic?

Answer 1

People demand money for three reasons: Transaction, speculative and precautionary demand of money.

The transaction demand of money means that money is needed for day to day transactions. This would mean that since income is received after a fixed time period, be it monthly, weekly or fortnightly, it is important that people have income which is used for everyday use.

Next we have precautionary demand for money: This means that the money is kept for uncertain times in future when costs arise. These could be healthcare costs etc.

The last type is the speculative demand for money: This means that money is used for financial assets like investments in bonds or foreign currency etc.

Money demand has changed in the pandemic of Covid-19.

This is because people would want to hold more money in form of precautionary demand of money. There are lockdowns, job losses and people have uncertainty about jobs in future. This forces them to save up money for precautionary purposes.

Also the demand for money would have increased ie the transaction demand, when people would want to buy more goods in ways of hoarding and also because of disruptive supply chains.

In case of speculative demand for money, there would be less demand, because one, people would need more money for future uncertainty and two because of volatile nature of currencies across the globe and for change in trade patterns, people would resort to safe and liquid investments, rather than investing in stocks.

So the demand for money would overall increase in the pandemic, mainly due to the uncertain nature of future.

(You can comment for doubts)