Question

Money has several roles. Which role is the demand for money based on?

	a.	primarily on money’s role as a store of wealth
	b.	primarily on money’s role as a standard of value
	c.	primarily on money’s role as an interest-bearing asset
	d.	primarily on money’s role as a medium of exchange

Answer 1

Money demand can be of three types:

• Transaction demand - Money required to carry out regular economic transactions like sale and purchase of non-financial items etc.
• Speculative demand - Money required to invest in risky assets or bonds
• Precautionary demand - Money set aside for emergency purpose

Transaction and Precautionary demand is based on Money's role as a Medium of exchange. However, speculative demand is based on money's role as an interest bearing asset. But, we can say that this can be safely ignored since demand for money majorly exists because of its universally acceptable nature as a medium of exchange. Therefore option (d) is the most appropriate.