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).