Give an example of a transactional demand or an asset demand for money in your life. Explain why this use fits into that category.
The correct answer and explanation is:
Correct Answer:
An example of transactional demand for money in my life is the money I keep in my bank account to pay for monthly expenses such as rent, groceries, transportation, and utility bills.
Explanation (300 words):
Transactional demand for money refers to the need to hold money for everyday purchases and regular financial obligations. This type of demand arises from the basic function of money as a medium of exchange. People keep a portion of their income in the form of cash or checking account balances to ensure they can easily and immediately cover their routine spending. The amount held for this purpose depends on the timing and frequency of income and expenses.
In my case, I ensure that there is enough money in my checking account to pay for fixed monthly costs like rent and variable expenses such as food and transportation. For example, at the beginning of each month, I set aside a portion of my salary specifically to handle these expenses. This is transactional demand because the money is not being saved for future investment or held to take advantage of potential market opportunities. Instead, it is used in the short term to meet immediate and expected costs of living.
This use fits the category of transactional demand because the money is not idle; it is actively circulating to facilitate daily exchanges of goods and services. The main reason for holding this money is convenience and readiness to meet predictable payments. Without this type of demand, managing household or personal finances would be difficult, as people would constantly need to convert non-liquid assets into cash to make payments.
Therefore, the money kept for paying recurring bills and everyday needs clearly demonstrates transactional demand, as it fulfills the purpose of enabling smooth and regular economic transactions in everyday life.