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Unit 8: Money
14. The market price of a bond depends on: Notes
(a) Bond ROI (b) Current market ROI
(c) Both bond ROI and current market ROI
(d) Sometimes, bond ROI and Sometimes on current market ROI
15. You hold money to buy things that satisfy your needs and wants. It is your ...........................
motive for money.
(a) Transaction (b) Precautionary
(c) Speculative (d) Secular
8.4 Summary
Money is defined anything that is generally accepted as a medium of exchange. Most
economic transactions are held through money.
“Medium of exchange” is the primary function of money. For anything to be called money
it must serve as a medium of exchange.
Money also serves as a store of value, unit of account and standard of deferred payment.
Two most common measures are called M and M . The M measure is called “transactions
1 2 1
money” (also called narrow money) and M measure is called “broad money”.
2
The main factors that influence the demand for money: rate of interest, GDP and price
level. The money is held as cash and as deposits in chequable accounts.
The two main motives for holding money are: the transaction motive and the speculative
motive.
People hold money to buy things. This is transaction motive.
Speculative demand for money is for taking advantage of fluctuating prices of bonds.
8.5 Keywords
Broad Money: It refers to the most inclusive definition of the money supply.
Commodity Money: It is money whose value comes from a commodity out of which it is made.
Fiat Money: Inconvertible paper money made legal tender by a government decree.
Money: Something generally accepted as a medium of exchange, a measure of value, or a means
of payment.
Speculative Demand for Money: It is for taking advantage of fluctuating prices of bonds.
Transactions Motive of Money: It results from the need for liquidity for day-to-day transactions
in the near future.
8.6 Review Questions
1. Define the term money. Explain functions of money.
2. Explain the concept of fiat and commodity money.
3. Explain determinants of demand for money.
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