Question

There are three reasons why people demand money: for use in transactions, for precautionary reasons (meaning in case of emergencies) and for speculative safety (meaning in case some investments drop in value). Give an example of a time when you demanded money for each of these reasons. Describe the specific circumstances of your demand for money.

Answer 1

I demand money for day to day transaction purposes, for example, to purchase grocery, vegetables, medicines and other small to big items. I hold some cash for some immediate purchase and save the rest of the amount in bank to get interest.

I demand money as a precaution against an unpredictable future. For example, medical emergencies or sudden failure of a vehicle on road require immediate payment. These are unexpected expenses, nobody has prior information about these expenses, so all people need to hold some money for immediate transactions. I can recall a moment when my father suddenly felt uneasy and we had to take him to hospital, at that time we required money that we had hold with us for immediate admission of my father into a hospital. So the need to have money in such emergency situations is known as precautionary reason for demanding money.

Speculative motive for demanding money arises where holding money involves less risk than investing it. For example, when there is a drop in the value of stocks, the importance of speculative motive demand for money increases. There was a time when I had invested some of my income in stock market, but after few days I came to know that the maket is going to break down, at that time I decided to sell all my shares and hold it as money. Although, holding money has no value if there is no immediate transaction but it is quite better than losing money in the stock market. I can invest my holding money when interest rates are expected to rise.