Transaction motive refers to the need to hold cash to meet regular payment collection activities associated with the ongoing operation of the firm. Transaction means the act of giving and taking cash or kind in the ordinary course of business. A firm often involves the purchase and sale of goods or services. A firm must make payment in cash for the purchase of goods, payment of salaries, wages, rent, interest, taxes, insurance, and dividends so on. A firm also received cash in terms of sales revenue, interest on loan, return on investments made outside the firm and so on. If these receipts and payments were perfectly synchronized, the firm will not have to hold cash for transactions motive. But in actual inflows and cash outflows cannot be matched exactly. Several times cash receipts exceed distribution while at other times than the receipt of payment. For this reason, if the payments exceed receipts, the firm should hold a certain level of cash to meet cash payments exceed the acceptance for the period. I have rm500 in my wallet. So I will divide rm100 for my daily expenses e.g. food, top up n etc.
2. Precautionary motive Of Cash Holdings
Precautionary motive refers to holding cash as a safety margin to act as a financial reserve. A firm must hold cash for the payment of an uncertain event or expected. A firm may have emergencies such as strikes and lock-up of employees, increase in the cost of raw materials funds, and labor, the decline in market demand and so on. Emergency also tied a firm to provide a certain level of cash. But how much cash is held to depend on the degree of anxiety associated with the projected future cash flows. If there is a high degree of predictability, less cash balance is insufficient. Some companies may have a strong lending capacity at a very short notice, so they can borrow at the time when an emergency occurs. Such firms may hold a very minimum amount of cash for this motif. I will divide rm150 for my emergency uses.
3. Speculative motive Of Cash Holdings
Speculative motive refers to the need to hold cash in order to be able to take advantage of bargain purchases that might arise, attractive interest rates and favorable exchange rate fluctuations. Some firms hold excess cash from the transaction and precautionary needs to engage in speculation. Needs to hold speculative cash need that the firm may have some beneficial opportunities to exploit, which is outside normal business. These opportunities arise in the situation, when raw material prices are expected to fall, when the rate of interest on borrowed funds is expected to decline and buy inventory occur at a reduced price on an immediate cash payment. I will divide rm250 for buying gold's where I can sell it back when the price increases.
TASK 4
What is inflation?
Inflation is defined as Is a steady an upward movement in the level of prices decreasing purchasing power over a period of time. The inflation is often measure by The Consumer Price Index (CPI) where it is the official measure of inflation or sometimes referred to as the Retail Price Index ( RPI ). The CPI can be thought of as an imaginary 'basket' of selected goods and services bought by a typical capital city household. It is important to remember that the CPI measures price movements and not actual price levels.
Demand Pull Inflation
Demand Pull Inflation occurs when Aggregate demand (C+I+G+(X-M)) increases at a rate faster than the capacity of the economy to produce goods and services ie: AD>AS.
This increase competition for goods and services drives up their prices.
Sources of Demand Pull Inflation
1. Any increase in Aggregate Demand (C + I + G + ( X - M ) ) as the economy approaches full employment.
2. Full employment causes labour shortages, employers thus bid up wages to attract labour. The increased income, transpires into increased consumption causing Aggregate Demand to rise.
3. High levels of foreign investment increases employment, income, consumptions and ultimately Aggregate Demand.
4. Growth in foreign economies can lead to higher incomes for our exporters, thus allowing increases in Aggregate Demand.
5. Inflationary expectations - If members of an economy expect prices to rise, it brings forward expenditure decisions leading to demand pull inflation eg: Pre GST in Australia.
6. Increasing consumption due to changes in consumption patterns (less savings at any level of income).
7. Monetary consideration - too much credit in the economy. A relaxed monetary policy leads to a reduction in interest rates leading to an increase in Aggregate Demand and thus prices.
Cost Push Inflation
Cost Push Inflation occurs when prices are pushed up by rising costs to producers who compete with each other for increasingly scarce resources. The increased costs are passed onto consumers.
Sources of Cost Push Inflation
1. Any input may become a major cost to business eg: wage increases lead to higher production costs.
2. Labour shortages in some sectors necessitate wage increases in that sector, however it has a domino effect leading to wage rises in other sectors.
3. NB: Wage rises in excess of productivity increase leads to inflationary pressure.
4. The extend to which a producer can pass on price rises depends on the level of competition in the industry.
5. The more competitive the industry, the more the producer has to absorb costs rather than pass them onto consumers.
6. Government budgetary problems - an increase in the cost of public utilities eg: electricity, water etc, leads to higher costs to business and households.
The effects and costs of inflation are reduced purchasing power. Purchasing power of fixed money will fall if the general price levels increased. Assuming the CPI (or inflation rate) has increased by 10% ceteris paribus, households can purchase/obtain 10% lesser than before. Inflation erodes the value of money. Then households with fixed income (e.g. monthly salary) will lose if their purchasing power falls due to inflation. Even if such workers enjoy an increase in salary they will still lose if the inflation rate is higher than the increase in their salary. Inflation has greater impact on fixed income earners.
Redistribution of wealth/income inflation tends to redistribute income away from those earning fixed incomes to those who with strong bargaining powers to get bigger wage increases. Pensioners and junior staff tend to lose while union workers and businessmen tend to gain. Inflation also redistributes wealth away from those renting to those who own properties. Inflation tends to make rich richer and the poor poorer. Inflation causes investment uncertainty inflation tends to cause uncertainty among firms and businessmen, since it is sometimes difficult to forecast the likely future rate if inflation. For example, will it be 3%, 5%, 7% or worst? An investor will most likely withhold expansion plans if the potential venture is only expected to return single digit ROI, since it is difficult to estimate his costs (note that different factors of production may actually experience different rate of increase in price/cost). Fluctuating annual inflation tends to reduce investments.
Exports becoming more expensive inflation mean that domestic price levels of goods and services have increases. If such products are also exported, it therefore also mean that exports are now more expensive than before. This may lead to reduced demand for the domestically produced goods, and hence a reduction in the flow of payments into the country. Assuming ceteris paribus, inflation tends to therefore worsen a country's Balance of Payments. Import becoming relatively less expensive, higher domestic price levels of goods and services will also mean that imported substitutes are now relatively cheaper. This may lead to increased demand for the foreign produced goods, and hence an increase in the flow of payments out of the country. Again assuming ceteris paribus, inflation tends to further worsen a country's Balance of Payments, which will lead to other problems.
Exchange rate becoming less favorable a worsening of the country's Balance of Payments between one country A and another country B will mean that the demand for country A's currency is reduced and an increase in demand for country B's currency. Assuming ceteris paribus, decreased demand for currency A concurrent with an increase in demand for currency B will cause the relative exchange rate between country A and B to worsen. Country A will need to pay more currency A for the same amount of currency B now that its currency is weaker relative to country B. Inflation tends to weaken a country' s rate of exchange. Lastly greater demand on resources because of inflation, households, firms and the government have to expand more time, effort and resources to analyze and manage its effect and costs to them. Inflation tends to demand greater effort on scarce resources of all concerned.
TASK 5
What are the functions of the money?
Money perform four specific functions, each of which overcome the difficulty barter. The function of money is to serve as:
Unit of value,
Medium of exchange,
Standard of deferred payments and
Store of value.
1. Language Exchange:
The most important function of money is to serve as a medium of exchange or as a means of payment. To be a successful medium of exchange, money must be commonly accepted by people in exchange for goods and services. Although functioning as a medium of exchange, money benefits the community in several ways:
(A) It overcoming difficulties baiter system (e.g. the need for double coincidence want) by splitting into two actions act barter exchange, namely, sales and purchases by money.
(B) It promotes the efficiency of transactions in exchange for facilitating exchange of various goods and services with minimum effort and time,
(C) It promotes locative efficiency by facilitating specialization in production and trade,
(D) It allows for freedom of choice in the sense that one can use the money to buy the things he wants most, of the people who offer the best deals and at the time it deems most advantageous.
2. Measurement Value:
Money serves as a measure of equal value in terms of the value of all goods and services is measured and expressed. By acting as a common denominator or numeraire, the money has provided a communication language economy. It has made the transaction easy and simplified the problem of measuring and comparing the prices of goods and services in the market. Price but the value specified in the form of money.
Money also serves as a unit of account. As a unit of account, it helps in developing an efficient accounting system for various values ​​of goods and services that are physically measured in different units (e.g. quintals, meters, liters, etc.) can be added up. This allows comparison of various, both over time and across regions. It provides a foundation for keeping accounts, national income estimates, project cost, revenues, profit and loss firms, etc.
To be a satisfactory measure of value, the monetary unit must be invariable. In other words, it must maintain a stable value. A monetary unit of volatility creates several socio-economic problems. Typically, the value of money, e.g. purchasing power, not remain constant, it increased during the period of falling prices and falling during a period of rising prices.
3. Standard of deferred payment:
When money is generally accepted as a medium of exchange and unit value, it naturally becomes the unit in terms of deferred payment or future specified.
Therefore, the money will not only help the current transaction even function as a medium of exchange, but the ease of credit transactions (e.g. exchanging goods present on credit) through its function as a standard of deferred payment. But, to be a satisfactory standard of deferred payment, money must maintain a constant value over time, if the value increased over time (e.g. during the period of falling price level), it would be beneficial to the creditor on the debtor costs, if the fall in value (e.g. in the level of prices), it would be beneficial to the debtor at the cost of creditors.
4. Store Value:
Money, as a unit of value and generally acceptable way of payment, providing liquid store value because it is so easy to spend and so easy to keep. To act as a store of value, money provides security to individuals to meet emergency uncertain and to pay debt set in terms of money. It also assured that the opportunity to buy an attractive future can be exploited.
Money as a liquid store owner to facilitate the purchase of any other asset at any time. It was Keynes who first realized the full value of the liquid store and considered money functions as a link between the present and the future. However, this does not mean that money is the most satisfying outlet liquid value. To be a satisfactory store of value, money must have a stable value
6 characteristic of good money
1.acceptability - Everyone must accept to purchase goods and services
2. Durability - It should last a long time
3. Portability - Easy to carry around
5. Divisibility - Can be divided into smaller units There are more as well, this is the basic
6.Uniformity- It means that all versions of the same currency denomination must have the same purchasing power that really must be denominated in uniform ..
6. Cognoscibility money should be easy to recognize
CONCLUSION
I started with business trade cycle to provide an appreciation of the relationships between growths, unemployment and inflation, to hence introduce the major macroeconomics issue and objectives. We should be aware of the various hindrances and difficulties to accurately measure each of the calculation.
