CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking
Which of the following best describes the precautionary motive for demanding money?
The precautionary motive is holding cash to meet unforeseen contingencies such as sudden illness, accidents or job loss. It differs from the transactions motive, which covers planned everyday expenses, and from the speculative motive, which is about exploiting expected changes in bond prices.
- AHolding cash to meet day-to-day purchases of goods
- BHolding cash to meet unforeseen contingencies such as sudden illness or loss of jobCorrect
- CHolding cash to speculate on future bond prices
- DHolding cash to earn interest on idle balances
Explanation
The precautionary motive is the desire to keep liquid funds for unexpected needs. Day-to-day purchases reflect the transactions motive, and speculating on bond prices reflects the speculative motive. Cash held in hand itself earns no interest.
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