Transcationary motive implies, holding money

Analyze the question: The question asks what the transactionary (transactions) motive means when people hold money. It comes from Keynes's theory of liquidity preference.

Explain the concept: Keynes identified three motives for holding money:

1. Transactions motive: holding money for day-to-day purchases and regular expenses, such as food, transport, school fees, and bills. It depends mainly on income. The higher a person's income, the more money they hold for transactions.
2. Precautionary motive: holding money for unforeseen events, such as illness, accidents, or sudden emergencies.
3. Speculative motive: holding money to take advantage of future changes in the prices of bonds, shares, or other assets, for example to buy shares when prices are expected to fall.

Solution: Compare each option with these motives.

• A. Future investment: this is not a transactions motive. It is closer to saving or speculation.
• B. Day-to-day expenses: this is the transactions motive.
• C. Unforeseen contingencies: this is the precautionary motive.
• D. Settling previous debts: this is a payment obligation, not the standard definition of the transactions motive.
• E. Buying shares on the stock exchange: this is the speculative motive.

Answer: The transactions motive means holding money to meet day-to-day expenses, which is option B.

Exam tip: Remember T-P-S:

• Transactions = Today's needs (daily spending)
• Precautionary = Problems or emergencies
• Speculative = Stocks and shares