Economics 9708 · AS & A Level · Oligopoly
Distinguish between the transactions demand for money and the speculative demand for money. Decide which of these is likely to matter more for a consumer in a modern economy.
Some economists argue that large budget deficits will raise the demand for money, whereas others claim that large budget deficits will reduce the demand for money. Discuss whether these views can be brought together.
This 25-mark question has a full step-by-step worked solution and mark scheme. One marking point: “Transactions demand is a demand for an active balance. It depends on the level of income and how frequently income is paid. It is interest inelastic. Speculative demand for money is influenced by expectations of the future rate of interest on long term government securities. These are idle balances and are closely linked to movements in the rate of interest. Their importance will differ according to the state of the economy, the level of income and the rate of interest.” …