Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases the quantity of money demanded when interest rates fall.
B
It decreases the quantity of money demanded when interest rates rise.
C
It has no effect on the equilibrium if money supply remains constant.
D
Both A and B are correct.
Understanding the Answer
Let's break down why this is correct
Answer
The speculative motive refers to the idea that people hold money not just for transactions, but also to take advantage of future investment opportunities. When interest rates change, it affects how much money people want to hold for speculation. For example, if interest rates rise, people might prefer to invest in bonds or savings accounts that earn more money, reducing their demand for cash. Conversely, if interest rates fall, holding cash becomes more attractive because people expect prices to rise, leading them to hold more money. This shift in demand can change the equilibrium in the money market, as the supply of money may not immediately adjust to match the new demand, leading to either excess supply or demand until a new balance is found.
Detailed Explanation
When interest rates change, people adjust how much money they want to hold. Other options are incorrect because This answer suggests that only falling rates increase money demand; This answer claims that rising rates decrease money demand alone.
Key Concepts
speculative motive
equilibrium in the money market
Topic
Money Demand and Supply Effects
Difficulty
medium level question
Cognitive Level
understand
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