Questions on Macro Economics
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© IMM Graduate School of Marketing Good Answer Booklet MAC/ECO101
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Note:
These answers were written by students under examination conditions. Whist it may be possible to find fault with some of the answers, keep in mind that they satisfied the examiners about the student’s knowledge and ability.
© IMM Graduate School of Marketing Good Answer Booklet MAC/ECO101
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MACROECONOMICS (MAC) ECONOMICS 1 (ECO101) 24 OCTOBER 2012
SECTION A (40 MARKS) COMPULSORY QUESTION 1 (MULTIPLE CHOICE) [/40]
SECTION B (60 MARKS) ANSWER ANY THREE (3) QUESTIONS QUESTION 2 [20/20]
2.1 According to the Keynesian view of money, there are three reasons why people hold money. Briefly describe the three (3) motives for holding money and the main determinants of each of these money balances. (15/15) According to the Keynesian view of money, there are three motives for holding money. These motives are transactionary motives, precautionary and speculative motive. Transactionary motive This is the demand for money as a medium of exchange. Money is needed for day to day expenses or day to day purchases of goods and services. Money is exchanged for goods and services that cater for the needs and wants of customers. The goods might involve the most basic ones such as food, water and shelter as well as clothing. Precautionary motive Money as a store of value can be used to cater for uncertainties. People desire money to cater for these uncertainties that might impact on their lives. Unexpected disasters such as death, floods, hailstorms and so on may increase the demand to hold money as a precaution. However certain economic conditions such as the rate of inflation may have special implications on the demand for money for precautionary motives. If the interest rate is too high, the demand for money for precautionary motives increases. Speculative motive Money as a store of value can be demand as an outcome of speculation or expectations.
© IMM Graduate School of Marketing Good Answer Booklet MAC/ECO101
Page 2 of 22
Note:
These answers were written by students under examination conditions. Whist it may be possible to find fault with some of the answers, keep in mind that they satisfied the examiners about the student’s knowledge and ability.
© IMM Graduate School of Marketing Good Answer Booklet MAC/ECO101
Page 3 of 22
MACROECONOMICS (MAC) ECONOMICS 1 (ECO101) 24 OCTOBER 2012
SECTION A (40 MARKS) COMPULSORY QUESTION 1 (MULTIPLE CHOICE) [/40]
SECTION B (60 MARKS) ANSWER ANY THREE (3) QUESTIONS QUESTION 2 [20/20]
2.1 According to the Keynesian view of money, there are three reasons why people hold money. Briefly describe the three (3) motives for holding money and the main determinants of each of these money balances. (15/15) According to the Keynesian view of money, there are three motives for holding money. These motives are transactionary motives, precautionary and speculative motive. Transactionary motive This is the demand for money as a medium of exchange. Money is needed for day to day expenses or day to day purchases of goods and services. Money is exchanged for goods and services that cater for the needs and wants of customers. The goods might involve the most basic ones such as food, water and shelter as well as clothing. Precautionary motive Money as a store of value can be used to cater for uncertainties. People desire money to cater for these uncertainties that might impact on their lives. Unexpected disasters such as death, floods, hailstorms and so on may increase the demand to hold money as a precaution. However certain economic conditions such as the rate of inflation may have special implications on the demand for money for precautionary motives. If the interest rate is too high, the demand for money for precautionary motives increases. Speculative motive Money as a store of value can be demand as an outcome of speculation or expectations.