Explain China's relatively large holdings of M1 in terms of the transactions motive, precautionary motive, or holding of wealth motive. In terms of excess money holdings (relative to the United States), which factor appears more important?

Question

Quizplus · Accepted Answer

The Answer is China tends to consume less of its GDP than say the United States, so on that basis at least we would expect the transactions motive to be less important for China. That suggests that the precautionary motive (being liquid in case of urgent needs or opportunities) and the store of wealth motive are likely culprits for the relatively high holdings of M2. The latter is particularly acute, since Chinese citizens have so few other ways of holding their wealth.

Explain China's Relatively Large Holdings of M1 in Terms of the Transactions