CA Foundation · Business Economics · Money Market
In Keynes's liquidity preference theory, the speculative demand for money is inversely related to which variable?
Speculative demand for money is inversely related to the rate of interest. At high interest rates, people expect bond prices to rise and so buy bonds instead of holding cash. At low rates, they expect bond prices to fall and prefer to hold money, so demand for cash rises.
- AThe rate of interestCorrect
- BThe level of national income
- CThe price level of consumer goods
- DThe number of bank branches
Explanation
When the interest rate is high, bond prices are low and expected to rise, so people hold bonds rather than idle cash and speculative demand falls. When the interest rate is low, bond prices are expected to fall, so people hold more cash. Income affects the transactions demand, not the speculative demand.
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