The correct option is 1 and 3 only
Explanation
The Speculative Demand for Money arises from the function of money as a store of value. According to John Maynard Keynes, individuals hold money not just for transactions but also to speculate on future movements in interest rates and bond prices. This demand is based on the trade-off between holding cash (which yields no interest but is liquid) and bonds (which yield interest but are subject to price fluctuations).
Statement-wise Analysis:
- Statement 1 is Correct: The speculative demand for money is inversely related to the market rate of interest. When interest rates are high, the opportunity cost of holding idle cash is high, and bond yields are attractive, leading to low demand for money. Conversely, when interest rates are low, the opportunity cost is low, and people prefer holding cash, anticipating rates will rise in the future.
- Statement 2 is Incorrect: Speculative demand is highly dependent on expectations regarding future movements in bond prices. Individuals hold money when they expect bond prices to fall (to avoid capital loss) and buy bonds when they expect bond prices to rise (to earn capital gains).
- Statement 3 is Correct: There is an inverse relationship between interest rates and bond prices. If interest rates are expected to rise, bond prices are expected to fall. To avoid the capital loss associated with falling bond prices, investors will sell their bonds and convert them into money, thereby increasing the speculative demand for money.
Key Takeaway:
Speculative demand for money is driven by interest rate expectations. It increases when interest rates are low (expecting them to rise and bond prices to fall) and decreases when interest rates are high.