Answer to Question #239245 in Macroeconomics for Composur

Question

Do you agree that it is economically advisable to hold money for transaction and precautionary motive in time of high inflation

Answer 1

Keeping cash will help keep up with inflation in nominal terms in cases where inflation is accompanied by rising short-term interest rates. It is advisable to keep some cash in a high yield saving account, money market account or CD.

However keeping too much cash poses a risk to individuals finances. It is therefore recommended setting aside six to nine months for single income household and six month for cash for two income households. It is good to maintain your shot term CDs while awaiting to understand what long term inflation may look like.