Preparing for Car Breakdowns: Importance of Emergency Funds

Explanation

Precautionary demand for money is defined as a demand for cash balances in case of unforeseen circumstances which require money.

The correct answer is E. precautionary demand for money.

Precautionary demand for money refers to the desire to hold extra money as a precautionary measure to meet unexpected future expenses or emergencies. It is based on the motive to have a financial buffer or reserve to handle unforeseen events or contingencies.

In the context of the given question, carrying extra money on a trip in case the car breaks down exemplifies the precautionary demand for money. By having additional funds readily available, individuals can cover any unexpected expenses that may arise during their journey, such as car repairs or alternative transportation arrangements.

The other options can be explained as follows:

A. Transactions demand for money: This refers to the demand for money to facilitate day-to-day transactions, such as buying goods and services, paying bills, or conducting regular financial activities. It is based on the need for money as a medium of exchange in the economy.

B. Inflationary demand for money: This concept is not directly related to the given scenario. Inflationary demand for money arises when people hold more money due to the expectation that prices will rise in the future. It is motivated by the desire to protect the purchasing power of money.

C. Restrictive demand for money: This term is not applicable in the given context. Restrictive demand for money arises when there are legal or institutional restrictions on accessing or using money. It is often associated with capital controls or other measures imposed by governments.

D. Speculative demand for money: This concept is not relevant to the given scenario. Speculative demand for money occurs when individuals hold money with the expectation that its value will increase in the future. It is based on the desire to profit from potential future price movements.

In summary, the extra money taken on a trip to handle car breakdowns represents the precautionary demand for money, which is the motive to hold additional funds as a precaution against unexpected expenses or emergencies.