Summary11 - 3. Are there times when people like to hold...

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CHAPTER 11 SUMMARY: 1. How much money do people like to have? Is the answer "all they can get?" The demand for money is the demand to hold assets in the form of money, not the demand for income or wealth. People usually do not hold all of their assets as money because by doing so, they forego interest on interest-bearing securities, such as bonds. 2. Why do people like to have money in their wallets and in their checking accounts? People like to hold money balances for a couple of reasons. First, people hold money in order to purchase goods and services. This is called the transactions motive. Also, people like to have money balances in order to take advantage of future speculative opportunities. This is called the speculation motive.
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Unformatted text preview: 3. Are there times when people like to hold more money than at other times? When interest rates are low, the opportunity cost of holding money balances is also low. When interest rates are higher, people forego more interest on interest-bearing securities by holding money balances. As a result, people hold less money when interest rates are high. 4. Sometimes interest rates are higher than at other times. What are some of the reasons for this? The equilibrium interest rate is determined by the supply and demand for money. When the supply of money falls or the demand for money increases, interest rates rise. An increase in the supply of money or a decrease in money demand causes the interest rate to fall....
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