Question:
Select the statement best explains the relationship between interest rates and the speculative demand for money.
(1) independent
(2) directly proportional
(3) increases as interest rates rise
(4) decreases as interest rates rise
(5) infinite at higher interest rates
Correct Answer:
(4)
Answer Explanation:
The speculative demand for money is based on holding cash to quickly buy financial assets (like bonds) when their prices fall. Bond prices and interest rates have an inverse relationship. When interest rates rise, the opportunity cost of holding idle cash is high, and bond prices are low (good time to buy). Therefore, people hold less cash for speculation.
Topic: Money and Banking Year: 2024
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