Consider the following statements:
(A) At r = rmax, everyone has converted the speculative money balance into bonds.
(B) When the rate of interest comes down, more and more people expect it to rise and anticipate capital loss.
(C) At r = rmax, the speculative demand for money is zero.
(D) When the rate of interest is very high, everyone expects it to fall and anticipates capital losses from bond-holding.
(E) When the rate of interest comes down, people expecting it to rise convert their money into bonds.
Which of the statements given above are NOT correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (D) and (E) only
Expecting the rate to fall means expecting capital gains, so people buy bonds. Expecting it to rise means fearing a capital loss, so they hold money.
(A) At r = rmax, everyone has converted the speculative money balance into bonds. — Correct. Everyone is sure of a future capital gain on bonds.
(B) When the rate of interest comes down, more and more people expect it to rise and anticipate capital loss. — Correct. A low rate is expected to go up.
(C) At r = rmax, the speculative demand for money is zero. — Correct. All speculative balances are in bonds.
(D) When the rate of interest is very high, everyone expects it to fall and anticipates capital losses from bond-holding. — Incorrect. People expect capital gains from bonds.
(E) When the rate of interest comes down, people expecting it to rise convert their money into bonds. — Incorrect. They fear a capital loss, so they convert bonds into money.
NCERT (2026-27): “The Speculative Motive … Thus speculations regarding future movements in interest rate and bond prices give rise to the speculative demand for money. 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. …” “… When r = rmax, speculative demand for money is zero. The rate of interest is so high that everyone expects it to fall in future and hence is sure about a future capital gain. Thus everyone has converted the speculative money balance into bonds. …” |