CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking
According to Keynes's liquidity preference theory, which of the following is the motive for holding money that depends mainly on the rate of interest?
The speculative motive is the one that depends mainly on the rate of interest. People hold idle cash to take advantage of expected changes in bond prices, and the amount held falls as interest rates rise, whereas transactions and precautionary balances depend chiefly on income.
- ATransactions motive
- BPrecautionary motive
- CSpeculative motiveCorrect
- DIncome motive
Explanation
Keynes identified three motives: transactions, precautionary and speculative. Transactions and precautionary balances depend mainly on income, whereas speculative balances vary inversely with the interest rate because bond prices and expected capital gains or losses change with it.
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