With reference to the demand for money, consider the following statements: 1. The demand for money is inversely related to the quantum of transactions in the economy. 2. A rise in income generally leads to a rise in the demand for money. 3. When interest rates go up, people become less interested in holding money. Which of the statements given above is/are correct?

The correct option is 2 and 3 only. Explanation The demand for money, often explained through the Liquidity Preference Theory, refers to the desire of economic agents to hold their assets in the form of liquid cash rather than interest-bearing investments. This demand is primarily driven by three motives: the transaction motive, the precautionary motive, and the speculative motive. Statement-wise Analysis - Statement 1 is Incorrect. The demand for money for transaction purposes is directly (positively) related to the quantum of transactions in the economy. As the volume of economic transactions increases, individuals and firms require more liquid cash to facilitate these exchanges. - Statement 2 is Correct. A rise in income generally leads to a rise in the demand for money. Higher income levels typically result in higher consumption and expenditure, thereby increasing the need for money to satisfy the transaction and precautionary motives. - Statement 3 is Correct. The demand for money is inversely related to the interest rate. The interest rate represents the opportunity cost of holding liquid cash. When interest rates rise, the cost of holding non-interest-bearing money increases (as one forgoes higher returns from bonds or deposits), causing people to reduce their money holdings and invest in interest-bearing assets. Key Takeaway The demand for money is positively correlated with income and the volume of transactions, but inversely correlated with the market interest rate (opportunity cost).

NCERT Class 12 Economics — Chapter 5: Money and Banking

mcqmedium

With reference to the demand for money, consider the following statements:

The demand for money is inversely related to the quantum of transactions in the economy.
A rise in income generally leads to a rise in the demand for money.
When interest rates go up, people become less interested in holding money.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B2 and 3 only
C1, 2 and 3
D2 only

Did you get this right?

Solution

The correct option is 2 and 3 only.

Explanation

The demand for money, often explained through the Liquidity Preference Theory, refers to the desire of economic agents to hold their assets in the form of liquid cash rather than interest-bearing investments. This demand is primarily driven by three motives: the transaction motive, the precautionary motive, and the speculative motive.

Statement-wise Analysis

Statement 1 is Incorrect. The demand for money for transaction purposes is directly (positively) related to the quantum of transactions in the economy. As the volume of economic transactions increases, individuals and firms require more liquid cash to facilitate these exchanges.
Statement 2 is Correct. A rise in income generally leads to a rise in the demand for money. Higher income levels typically result in higher consumption and expenditure, thereby increasing the need for money to satisfy the transaction and precautionary motives.
Statement 3 is Correct. The demand for money is inversely related to the interest rate. The interest rate represents the opportunity cost of holding liquid cash. When interest rates rise, the cost of holding non-interest-bearing money increases (as one forgoes higher returns from bonds or deposits), causing people to reduce their money holdings and invest in interest-bearing assets.

Key Takeaway
The demand for money is positively correlated with income and the volume of transactions, but inversely correlated with the market interest rate (opportunity cost).

Your note

More from Chapter 5: Money and Banking

If the Reserve Bank of India increases the Bank Rate, what is the likely impact on the economy?

medium

The 'Currency Deposit Ratio' in the banking system is primarily determined by:

medium

Consider the following statements regarding the functions of money: 1. Economic exchanges without money are referred to as liquidity exchanges. 2. The principal role of money is to facilitate exchanges by acting as a medium of exchange. 3. In a barter system, the search costs increase as the number of individuals in the economy increases. Which of the statements given above is/are correct?

medium

With reference to the 'Unit of Account' function of money, consider the following statements: 1. If there is a general increase in the price level, the value of money in terms of commodities increases. 2. It allows the value of all goods and services to be expressed in monetary units. 3. It prevents the calculation of relative prices of different commodities. Which of the statements given above is/are correct?

medium

Consider the following statements regarding money as a 'Store of Value': 1. Money is an asset that can act as a store of value. 2. The value of money is irrelevant for it to perform the function of a store of value. 3. Storage costs of money are considerably lower compared to perishable commodities like rice. Which of the statements given above is/are correct?

medium

Keep practising Chapter 5: Money and Banking

Work through every question from this NCERT chapter.

Browse all NCERT Class 12 Economics chapters

The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis

Statement 1 is Incorrect. The demand for money for transaction purposes is directly (positively) related to the quantum of transactions in the economy. As the volume of economic transactions increases, individuals and firms require more liquid cash to facilitate these exchanges.
Statement 2 is Correct. A rise in income generally leads to a rise in the demand for money. Higher income levels typically result in higher consumption and expenditure, thereby increasing the need for money to satisfy the transaction and precautionary motives.
Statement 3 is Correct. The demand for money is inversely related to the interest rate. The interest rate represents the opportunity cost of holding liquid cash. When interest rates rise, the cost of holding non-interest-bearing money increases (as one forgoes higher returns from bonds or deposits), causing people to reduce their money holdings and invest in interest-bearing assets.

Key Takeaway
The demand for money is positively correlated with income and the volume of transactions, but inversely correlated with the market interest rate (opportunity cost).