Different Motives of Holding Money

What is Opportunity Cost of Money?

If instead of holding Money in cash form, we deposit it in bank

We get interest

This is Opportunity cost of Money

Why do People hold money?

They have liquidity preference

It arises because of

Transaction motive of Money

It means the desire to hold money for cash-based transactions

Eg: A person has Rs100 with him

He has 2 options either to spend them or deposit in bank

If the person has the desire to use money for some transaction/ purchase

then he will not deposit this in bank and hold it.

Speculative Motive of Money

It refers to the desire of a trader/ investor to hold money so as to make use of it when a

good investment opportunity arises later.

Precautionary Motive of Money

It is a desire to hold money to be able effectively with unexpected events that require cash outlay.

Eg: A person can have the desire to hold money as a precautionary measure to deal with future uncertainties.

NCERT QUESTIONS

Question 3

What is transaction demand for money?