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1. The Transaction Motive
A certain amount of money is needed for everyday requirements, the purchase of food and clothing
and other ordinary expenses. How much is necessary to hold for these purposes will depend on 3
factors.
a) A person?s income
b) The interval between one pay-day and the next
c) Habit
Generally the higher the income the more money will be held. The weekly wage-earner will need to hold less
than a person who receives his salary monthly, for in the first case, sufficient amount has to be held to cover
expenses for only one week, whereas the other man has to make provision for four weeks
2.The Precautionary Motive
People hold money in reserve to cover unanticipated contingencies which might arise in the period or sudden
purchase of opportune advantage. The amount held will depend mainly on the outlook of the
individual,how optimistic he is both as regards events and the possibility of borrowing at short notice
should the need arise. But, taking the community as a whole, the amount set aside for the precautionary
motive is, in normal times, likely to be tied fairly closely to the level of national income.
3. The Speculative Motive
Another major reason for holding money is in order to speculate on the course of future events. If one thinks
prices are now very low and will soon rise, the tendency is to buy now and to put off selling until prices rise.
If one thinks prices are high now and will soon fall, the tendency is to sell now and to postpone buying until
prices have fallen.
This emphasizes the role of money as a store of wealth. Speculative Balances are wealth held in the form of
money rather than interest earning assets because of expectations that the prices of those assets may change.
Wilfykil answered the question on February 6, 2019 at 11:09
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