Question

Your textbook (Microeconomics 9th Edition) gives 3 “motives” for holding money. Please list one of these motives and give an example, not the definition, of why you might hold money using the rationale of motive that you have selected.

Answer 1

Three motives are as below:

No.1) Transaction motive: people want to hold cash in order to meet some day-to-day expenses, like purchasing grocery, payment of electric bill, payment to sweeper, purchasing of raw materials, etc.

No.2) Precautionary motive: people want to hold cash today for future unforeseen incidents – like sudden need of money for medical purpose, holiday trip, etc.

No.3) Speculative motive: this is the need of holding cash for exploiting an opportunity – suppose holding cash for investing in share market when price of share falls.

One motive out of the above list:

Transaction motive: I am a businessman. Therefore, my transaction motive is to pay salary to staffs and payment for electric bill. These are very important in order to run business – if staffs are not getting salary, they will not work; if periodical (monthly) electric bills are not paid, my business establishment would be power-cut. I do not want such adversities, since creating those situations are not at all conducive to the business. Therefore, I always hold money for fulfilling those transactions needs.