IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy
In Keynes's liquidity preference theory, which of the following is the motive for holding money that is most sensitive to the rate of interest?
The speculative motive is the most interest-sensitive. Transactions and precautionary balances depend mainly on income, whereas speculative holdings fall when interest rates are high, since bond prices are then expected to rise, and rise when rates are low.
- ATransactions motive
- BPrecautionary motive
- CSpeculative motiveCorrect
- DFinance motive for planned payroll
- Inflation-hedging motive
Explanation
Keynes treated transactions and precautionary balances as depending mainly on income. The speculative demand depends on the interest rate, because a high rate means low bond prices and an expected capital gain, so people hold less idle money. Hence the speculative motive is the interest-sensitive one.
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