Question

In your opinion, does the amount of the precautionary motive demand a relatively large proportion of the total demand for money in an economy. Link your analysis to the concept of the business cycle in a macroeconomic analysis framework.

Answer 1

There are three motives for which money is demanded in the economy. These are for transaction purpose, for precautionary purpose and for speculation purposes.

Out of all the three motives, money demand is the highest for the transaction purpose because for every transaction that takes place in the economic market, there is exchange of money especially when there is boom phase in the business cycle.

The demand for money for precautionary purposes is also high but it is not as high as the demand for the transaction purpose.

But if there is recession phase in the economy, then the money demand for transaction purpose would be low and for precautionary purpose it would be high.