Which of the following scenarios is an example of the precautionary motive to hold cash?
A)A retailer holds a reserve of cash in case customers return products for a cash refund.
B)A bank holds cash on deposit for its customers.
C)A car dealership holds cash to pay its utility bill.
D)A small business pays a cash dividend to its owner because she's not sure she will have enough funds to pay for Christmas gifts for her family.

Question

Quizplus · Accepted Answer

The precautionary motive for holding cash involves holding cash as a precaution against unforeseen events or emergencies. In this scenario, the retailer is holding cash as a reserve in case customers return products for a cash refund, which is an example of the precautionary motive. Holding cash to pay bills (like in option C) or for personal expenses (like in option D) do not fall under the precautionary motive. Holding cash on deposit for customers (like in option B) is an example of the transactional motive.

Which of the Following Scenarios Is an Example of the Precautionary