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CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking

In Keynes's liquidity preference theory, the speculative demand for money is inversely related to which variable?

The speculative demand for money is inversely related to the rate of interest. At high rates people prefer to hold bonds because they expect bond prices to rise, so idle cash falls. At low rates the opportunity cost of holding cash is small, so cash holding rises.

  1. ARate of interestCorrect
  2. BLevel of national income
  3. CSize of the family
  4. DVolume of trade transactions

Explanation

When the interest rate is high, bond prices are low and people expect them to rise, so they hold less idle cash and buy bonds. When the interest rate is low, they expect bond prices to fall and hold more cash. Income affects transactions demand, not speculative demand.

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