The speculative demand for money is MdS = (rmax − r)/(r − rmin), where rmax = 10 per cent and rmin = 2 per cent. If the market rate of interest falls from 6 per cent to 4 per cent, the speculative demand for money:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → rises from 1 to 3
Given:
\( M^d_S = \displaystyle\frac{r_{max} - r}{r - r_{min}} \), with rmax = 10 and rmin = 2
Put each rate of interest into the formula.
At r = 6: \( \displaystyle\frac{10 - 6}{6 - 2} = \frac{4}{4} = 1 \)
At r = 4: \( \displaystyle\frac{10 - 4}{4 - 2} = \frac{6}{2} = 3 \)
Speculative demand rises from 1 to 3. A fall in the rate of interest raises speculative demand for money.
NCERT (2026-27): “The Speculative Motive … 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. Assuming a simple form, the speculative demand for money can be written as … where r is the market rate of interest and rmax and rmin are the upper and lower limits of r, both positive constants.” |