According to Edward Bahaw, Money can be defined as anything which is generally acceptable as a means of settling a debt obligation. Money can also be defined a medium of exchange, standard of deferred payment, unit of account and a store of value. As persons need money to get things done, persons will demand and hold money for various reasons. Firstly money demanded can be defined as the amount of money a person holds in their possession. The three motives for holding money include 1) Transactionary Motives, 2) Precautionary Motives and 3) Speculative Motives. These will be described below.
A. Transactionary motives refer to the amount of money that is held by an individual or an organization for daily uses …show more content…
This means that a person will assets when it is at a very low rate and will sell only when they see that they will make a profit. They will sell before it gets lower than the price that they have originally paid for because they wish to making avoid a loss. There is an inverse relationship between the demand of money for speculative motives and the interest rate because as the interest rate rise then the price for financial assets will falls meaning that people will buy more causing people to stop holding their …show more content…
It involves the buying and selling of government securities in the open market. This may cause an expansion or a contraction in the amount of money in the banking system.
Moral Suasion refers to the fact that central banks may attempt to extend its monetary policy stance on the economy by simply communicating its wishes to the financial sector. (Bahaw, 2011). Moral Suasion refers to a method adopted by the central bank to persuade or convince the commercial banks to advance credit in accordance with the directives of the central bank in the economic interest of the country. They use this in an effort to get aggregate expenditure at the level they see fit.
C. Central banks use monetary policy for ways to positively impact the economy. If the country is in a state which there is a low aggregate demand they will use expansionary measures in an effort to increase demand. Such measures include the increase in the supply of money, lowering of interest rates, a tax reduction and increase in government spending. All of these are tools that gets the economy boosting and is a way of obtaining economic growth. The central bank can also use contractionary methods to reduce the amount of money in the economy. This can be used to reduce inflation. If inflation is caused from too much money chasing too few good then it would be wise to find means to reduce the amount of money that a person can get. With the reduction in the amount
A. Transactionary motives refer to the amount of money that is held by an individual or an organization for daily uses …show more content…
This means that a person will assets when it is at a very low rate and will sell only when they see that they will make a profit. They will sell before it gets lower than the price that they have originally paid for because they wish to making avoid a loss. There is an inverse relationship between the demand of money for speculative motives and the interest rate because as the interest rate rise then the price for financial assets will falls meaning that people will buy more causing people to stop holding their …show more content…
It involves the buying and selling of government securities in the open market. This may cause an expansion or a contraction in the amount of money in the banking system.
Moral Suasion refers to the fact that central banks may attempt to extend its monetary policy stance on the economy by simply communicating its wishes to the financial sector. (Bahaw, 2011). Moral Suasion refers to a method adopted by the central bank to persuade or convince the commercial banks to advance credit in accordance with the directives of the central bank in the economic interest of the country. They use this in an effort to get aggregate expenditure at the level they see fit.
C. Central banks use monetary policy for ways to positively impact the economy. If the country is in a state which there is a low aggregate demand they will use expansionary measures in an effort to increase demand. Such measures include the increase in the supply of money, lowering of interest rates, a tax reduction and increase in government spending. All of these are tools that gets the economy boosting and is a way of obtaining economic growth. The central bank can also use contractionary methods to reduce the amount of money in the economy. This can be used to reduce inflation. If inflation is caused from too much money chasing too few good then it would be wise to find means to reduce the amount of money that a person can get. With the reduction in the amount