Which of the following statements about the speculative demand for money is NOT correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → It rises when people expect bond prices to rise in future.
People hold money for speculation when they fear a fall in bond prices. If they expect bond prices to rise, they buy bonds and hold less money.
Option (1) It arises from speculation about future movements in the rate of interest and bond prices. — True. This is the source of speculative demand.
Option (2) It rises when people expect bond prices to rise in future. — False. Expected capital gains make people turn money into bonds, so speculative demand falls.
Option (3) It is low when the rate of interest is very high. — True. At a very high rate everyone expects it to fall and buys bonds.
Option (4) It is inversely related to the market rate of interest. — True. Lower rate, higher speculative demand.
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. …” |