The correct option is 2 and 3 only.
Explanation
The Speculative Motive for demanding money is a core component of the Keynesian Liquidity Preference Theory. It refers to the desire to hold cash as an asset to take advantage of future changes in interest rates and bond prices. It is distinct from the transaction and precautionary motives, which are primarily driven by income levels.
Statement-wise Analysis
- Statement 1 is Incorrect. The speculative motive arises from the store of value function of money and the trade-off between holding non-interest-bearing cash and interest-bearing bonds. It does not arise from the transaction motive; the transaction motive relates to holding money for current expenditures and is a function of income, whereas the speculative motive is a function of the interest rate.
- Statement 2 is Correct. There is an inverse relationship between the market rate of interest and the speculative demand for money. When the market rate of interest is very high, bond prices are low. Investors expect interest rates to fall and bond prices to rise in the future. Consequently, they convert their cash into bonds to earn capital gains, resulting in a low speculative demand for money.
- Statement 3 is Correct. The price of a bond is inversely related to the market rate of interest. A bond promises a fixed return (coupon payment). If the market interest rate rises, the fixed return becomes less attractive compared to new bonds, causing the price of the existing bond to fall. Conversely, if interest rates fall, the bond price rises.
Key Takeaway
Key Takeaway: The speculative demand for money is interest-elastic and inversely related to the market rate of interest. Investors hold money when interest rates are low (expecting them to rise) and buy bonds when interest rates are high (expecting them to fall).