IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy
In Keynes's liquidity preference theory, which motive for holding money is mainly driven by uncertainty about future cash needs, such as an unexpected repair bill for a firm?
It is the precautionary motive. Firms and households hold money as a buffer against unexpected expenses, whereas the transactions motive covers planned payments and the speculative motive relates to expected changes in bond prices and interest rates.
- ATransactions motive
- BPrecautionary motiveCorrect
- CSpeculative motive
- DInvestment motive
- Fiduciary motive
Explanation
Keynes identified three motives: transactions (day-to-day payments), precautionary (unforeseen needs) and speculative (waiting for better asset prices). Holding cash against unexpected expenses is the precautionary motive. The transactions motive covers planned, regular spending.
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