Chapter 22, Problem 12Q

To determine

In case the question requires us to explain the speculative demand for money in a country.

Concept Introduction:

Speculative demand: Speculative demand is the demand for liquid cash to take advantage of the share market. It depends on the future changes in the interest rate or bond prices. According to Keynes, the speculative demand for money is inversely related to the rate of interest. The higher the rate of interest, the lower the speculative demand for money. And lower the rate of interest, the higher the speculative demand for money. According to Keynes, the speculative demand for money is directly related to the bond price. If bond prices are expected to rise, people will buy bonds and sell after it has increased to have a capital gain. Contrary to this, if bond prices are likely to fall in future, people will sell bonds to evade capital loss. Under such circumstances, cash is more preferred than bond.

Liquidity: Liquidity is a term used to describe how quickly an asset can be converted into cash. If you keep the money in some other form of asset, or in bank, you will actually have a separation with the liquid form. Liquidity is the easiness of holding cash form of money rather than any other form. Interest rate is considered as the compensation for separation with the liquidity form of money.