Weighing the advantage of liquidity against the disadvantage of the interest foregone, demand for money balance is often referred to as:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → liquidity preference
Money is the most liquid asset, but holding it means giving up interest. Weighing these two, people choose how much money to hold. So demand for money balance is called liquidity preference.
NCERT (2026-27): “Box 3.1: Demand and Supply for Money : A Detailed Discussion Money is the most liquid of all assets in the sense that it is universally acceptable and hence can be exchanged for other commodities very easily. On the other hand, it has an opportunity cost. If, instead of holding on to a certain cash balance, you put the money in a fixed deposits in some bank you can earn interest on that money. While deciding on how much money to hold at a certain point of time one has to consider the trade off between the advantage of liquidity and the disadvantage of the foregone interest. Demand for money balance is thus often referred to as liquidity preference. People desire to hold money balance broadly from two motives.” |