Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): When the rate of interest is very high, the speculative demand for money is low.
Reason (R): When the rate of interest is very high, everyone expects it to rise further in future.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) is true but (R) is false.
At a very high rate of interest, people expect the rate to fall, not rise. So A is true but R is false.
Assertion (A): When the rate of interest is very high, the speculative demand for money is low. — True. People expect capital gains from bonds, so they convert their money into bonds.
Reason (R): When the rate of interest is very high, everyone expects it to rise further in future. — False. At a very high rate, everyone expects it to fall. A fall in the rate means a rise in bond prices.
NCERT (2026-27): “The Speculative Motive … When the interest rate is very high everyone expects it to fall in future and hence anticipates capital gains from bond-holding. Hence people convert their money into bonds. Thus, speculative demand for money is low. When interest rate comes down, more and more people expect it to rise in the future and anticipate capital loss. Thus they convert their bonds into money giving rise to a high speculative demand for money. Hence speculative demand for money is inversely related to the rate of interest.” |