The speculative demand for money is MdS = (rmax − r) / (r − rmin), where rmax = 12 per cent and rmin = 4 per cent. At what market rate of interest (r, in per cent) will the speculative demand for money be 3?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 6 per cent
Given:
rmax = 12
rmin = 4
MdS = 3
Put the values into the speculative demand function and solve for r.
\( \displaystyle 3 = \frac{12 - r}{r - 4} \)
\( 3r - 12 = 12 - r \)
\( 4r = 24 \), so r = 6 per cent
Check: at r = 6, (12 − 6) ÷ (6 − 4) = 3. At 8 per cent the demand is only 1. A lower rate gives a higher speculative demand.
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 |