Answer to Question #194004 in Macroeconomics for Nkeletsang Marupin

Question

(A) Discuss the four (4) Functions of Money (2 Marks). (B) With an example each, explain in detail, the three motives of why individuals hold money (6 Marks).

Answer 1

(A)

Money serves a variety of purposes. It is, first, a medium of exchange. Person A can sell his items to B in exchange for money, and then use that money to buy the goods he desires from those who have them. There will be no problems with the exchange process as long as money is widely accepted. Second, it is a measure of value. Money is used as a metric for determining the worth of commodities and services. The relative values of commodities and services can be easily compared since their worth is measured in a common unit of money. Third, money is a deferred payment norm. If a loan is taken today, it will be repaid after a certain amount of time has passed. The loan amount is expressed in monetary terms, and it is repaid in monetary terms. Every day, a big number of credit transactions with big future payments are completed. Money serves as a baseline for deferred payments since its value remains relatively constant. Lastly, money serves as a store of value. Money is a practical way to keep money because it is the most liquid of all assets. Currency can be kept as a valuable asset. Money's asset function is the store of value function.

(B)

People keep money for three reasons. Cash is kept by people for the purpose of transactions. For example, everyone keeps a cash balance to satisfy daily transactions such as paying a creditor, purchasing products and services, paying rent, and investing in a business. Besides, some people keep money for the sake of speculation. A speculator, for example, is always looking for a project to put money in briefly in order to make a large profit right away. An opportunist must always keep a cash balance in order to reap the benefits and outcomes of speculation. The future is always a guessing game. As a result, everyone holds money and keeps a cash balance in case of future uncertainty. With the growth of businesses and individuals, everyone's future is quite unpredictable, thus they maintain cash to meet future uncertainty threats.