CA Foundation · Business Economics · Money Market
According to the Keynesian theory of demand for money, which of the following is the motive for holding cash that depends mainly on the rate of interest?
The speculative motive is the one that depends mainly on the rate of interest. Transactions and precautionary demands for money are driven chiefly by income, whereas speculative holdings of cash vary inversely with interest rates, since people hold cash expecting to buy bonds when their prices fall.
- ATransactions motive
- BPrecautionary motive
- CSpeculative motiveCorrect
- DIncome motive
Explanation
Keynes said the transactions and precautionary demands depend mainly on the level of income. The speculative demand for money depends inversely on the rate of interest, because people hold cash to gain from expected changes in bond prices. Hence the speculative motive is the correct answer.
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