Increase in Money Demand for Mr. Brown

Understanding the Types of Money Demand for Mr. Brown

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Question

Mr. Brown was in the habit of cashing his weekly paycheck and using this cash for his daily expenses. However, he now gets his paycheck direct deposited into his checking account and uses a debit card exclusively instead of cash. This represents an increase in which of the following types of money demand for Mr.

Brown?

Answers

Explanations

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A. B. C. D. E. F.

Explanation

Mr. Brown money demand has not changed. He is still using his weekly paycheck to satisfy normal expenses, or transactions demand. Although he is "storing" his cash in a checking account until it is to be used, this does not represent store-of-wealth demand. Store-of-wealth implies money that is either invested or accumulated for some future need.

Note that although Mr. Brown's money spending habits have not changed, the way his money is measured by economists has changed. Previously his money was held entirely in currency, whereas now a portion of his money is held in reserve by his bank. Although effectively there has been no change in the use of money, certain monetary aggregates will change.

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