MACROECONOMICS 1B 2022 TUTORIAL

CHAPTER 14 TUTORIAL ANSWERS

Monetary sector

1. A
2. B
3. D
4. A
5. C
6. B
7. D
8. B
9. C

10. How would you explain to a family member what money is?
We use the term “money” in a variety of contexts. For example, we say that “a person has a
lot of money”, meaning that he/she is wealthy, or we say that “we need money to buy
things”, meaning that we must be able to afford the items in question. When we think
about money, we usually have notes and coin in mind.
Money, however, is simply a generally accepted means of payment or medium of exchange.
Notes and coin are the most obvious examples, but they constitute a relatively small part of
the total amount of money. In most cases payment is effected by transferring deposits from
one person to another, for example, electronically or by writing out a cheque

11. Describe the main motives for holding money.

Why do people hold money? There are two basic reasons: to be able to enter into
transactions and because they want to keep part of their wealth in the form of money. The
first is called the transactions motive and the second the speculative motive. The
transactions motive is simple to understand. To be able to partake in a money economy, to
enter into transactions, to buy goods and services, you need money (as a means of payment
or medium of exchange). The ultimate purpose is to “spend” the money, which is why it is
also called a demand for active balances.
But some people also hold money over and above the amount they require for transactions
purposes. This is the demand for money as a store of value, or what we call the speculative
demand for money. People keep some of their wealth in the form of money because they
believe it is the correct thing to do. This so-called demand for passive balances is strongly
related to the current and expected level of interest rates.
Thus we have the transactions motive (related to money as a medium of exchange) and the
speculative motive (related to money as a store of value).