According to Keynes, motives for holding money are
Correct Answer: b. Three
According to Keynes, there are primarily three reasons for holding money. Let’s examine each motive in detail and provide further explanation:
One of the main reasons to hold money is to facilitate day-to-day transactions and cover their regular expenses. The transactions motive is one of the most straightforward and essential reasons to hold money. When you go to a coffee shop or restaurant and buy a cup of coffee or dine, you pay cash or with a credit/debit card.
By holding money, you ensure that you have the necessary means to conduct these routine transactions without relying on complex bartering systems or immediate borrowing. As a result of its direct correlation to the level of economic activity and the frequency of transactions, the transaction motive is a major determinant of the demand for money in an economy.
As a precautionary measure, holding money is motivated by the desire to protect oneself from financial emergencies and uncertainties that may arise. In life, unforeseen events can happen, such as medical emergencies, car accidents, or sudden job losses. Having a cash reserve allows people to handle unexpected expenses without resorting to borrowing or selling assets hastily. By holding money as a precaution, individuals and businesses create a buffer against these contingencies.
The speculative motive for holding money is the expectation of future investment opportunities. Some people may prefer to hold more money temporarily when they anticipate changes in asset prices, interest rates, or other investment conditions. When they hold money for speculative purposes, they are able to wait for more favorable investment prospects before committing their money.
Individuals may hold a larger portion of their wealth in cash during times of economic uncertainty or financial market volatility than they might invest it right away. People’s investment decisions and risk tolerance are influenced by the speculative motive, which affects the demand for money.
Why the other options are not correct
The answer (a) “Two” is incorrect since Keynes proposed three reasons for holding money: transaction, precautionary, and speculative. Money demand in an economy is influenced by a number of motives. If one motive is ignored, one would lose a complete understanding of the factors that influence it.
Keynes identified three reasons for holding money, not four. The addition of an extra motive would violate Keynes’s original theory and would be inaccurate. An economy’s demand for money is shaped by a number of factors. Keynes’ framework provides a comprehensive analysis of these factors.
Since Keynes explicitly includes three motives, not five, in his theory of money demand “Five” is incorrect. There would be confusion regarding the motivations for holding money if additional motives were added, which would be unsupported by Keynesian economics.
According to Keynes, money holding behavior in an economy is driven by three motives: the transactions motive, the precautionary motive, and the speculative motive.
The transaction motive ensures smooth and efficient day-to-day transactions. The precautionary motive provides financial security for unexpected contingencies. And the speculative motive reflects anticipation of future investment opportunities.
To maintain a stable and prosperous economy, it is crucial to understand these motives when analyzing money demand, formulating monetary policies, and managing economic fluctuations.