Consider the following statements about the speculative motive for holding money:
(A) Speculations regarding future movements in the rate of interest and bond prices give rise to the speculative demand for money.
(B) A bondholder who expects bond prices to fall will try to sell her bonds and hold money instead.
(C) When the rate of interest is very high, the speculative demand for money is high.
(D) The speculative demand for money is inversely related to the rate of interest.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (B) and (D) only
People hold money for speculation when they expect bond prices to fall. They switch between bonds and money as their view of interest rates changes.
(A) Speculations regarding future movements in the rate of interest and bond prices give rise to the speculative demand for money. — Correct. This is the source of the speculative demand.
(B) A bondholder who expects bond prices to fall will try to sell her bonds and hold money instead. — Correct. She sells to avoid a capital loss.
(C) When the rate of interest is very high, the speculative demand for money is high. — Incorrect. At a high rate everyone expects it to fall and bond prices to rise. People buy bonds, so speculative demand is low.
(D) The speculative demand for money is inversely related to the rate of interest. — Correct. A high rate means low demand; a low rate means high demand.
NCERT (2026-27): “The Speculative Motive … You expect interest rate to rise and consequently bond prices to fall. If you are a bond holder a decrease in bond price means a loss to you - similar to a loss you would suffer if the value of a property held by you suddenly depreciates in the market. Such a loss occurring from a falling bond price is called a capital loss to the bond holder. Under such circumstances, you will try to sell your bond and hold money instead. 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. …” |