2. The demand for money to take advantage of an investment opportunity. We said that speculative demand also depends on the conditions in other markets, such as the bond market and the expectations of returns in those markets. speculative motive. he publication of Tobin's (1958) well-known article on liquidity-preference, monetary theorists have paid little attention to the Keynesian speculative motive for holding money. The speculative motive shows that when interest rates are lower, people would rather have the access to the cash asset that is liquid instead of earning a low interest rate (Muley, n.d.). If it is felt that the interest rate is going to rise (meaning the price of bonds will fall) the investor will hold money until the fall in the price of bonds is realized. We have seen that the transactions, precautionary, and speculative demands for money vary negatively with the interest rate. The speculative or asset demand for money is the demand for highly liquid financial assets — domestic money or foreign currency — that is not dictated by real transactions such as trade or consumption expenditure.Speculative demand arises from the perception that money is optimally part of a portfolio of assets being held as investments. IN CONTINUATION TO THE KEYNES LIQUIDITY PREFERENCE THEORY THIS PART DEALS WITH THE SPECULATIVE MOTIVE FOR THE DEMAND OF MONEY DONATION LINKS PAYTM: 9179370707 BHIM: 9179370707@upi. The transactions motive - Demand for money for using it as a medium of exchange for day to day transactions. Aims: By the end of this chapter, you will be able to (i) explain the reasons for demanding money, (ii) distinguish the view of Keynesians from that of Monetarists on the shapes of Liquidity curve, and (iii) depicts the equilibrium in the money market using an appropriate diagram. A. Keynesian Money Demand. Money held for transactions and precautionary motives is a function of the level of income, and for the speculative motive, it is a function of the interest rate. So, the LP curve shows how the total demand for money varies with the rate of interest and it is drawn for a specific level of national income. The speculative motive does not explain why someone would hold cash or a checking account (M1) rather than an equally safe interest-bearing savings account or certificate of deposit (M2). Suppose that interest rates fluctuate. (ii) On the contrary, if the rate of interest is low and people expect it to rise in future (i.e., fall in price of bond) anticipating capital loss from bond holding, people convert their bonds into money in order to avoid future capital loss. speculative demand for money Consider the system x = x + e y , y = -y First use qualitative arguments to obtain information about the phase portrait. Speculative demand for money varies inversely with the market rate of interest. To the Keynesians, it is expectations about changes in bond prices or in the market rate of interest that determine the speculative demand for money. He called this the speculative motive because, when interest rates go up, people will hold less cash and instead hold more bonds. Speculative motive. The speculative demand for money (S dm) is stated by the function S dm = f (r) where Y is the rate of interest (Muley, n.d.). Thus, the speculative motive concerns an increase in the demand for money balances as a means to realising a gain, possibly, in anticipation of likely changes in the value of bonds (a form of security asset), but also, most generally, in expected changes in the value of a variety of assets. ANSWER: D NOTES: REF: 173. The speculative demand for money is the stock of money that people hold to: a) pay their predictable, everyday expenses b) pay for any unexpected expenses that may occur c) buy stocks, bonds, and other financial assets d) buy the foreign currencies needed to purchase imports B. Speculative demand for money - Stability Market speculation activities Keynesian school of thought, the public demand for money (ie, liquidity preference) from the transaction motive, motive and speculative motive caution. A rise in the demand for consumer spending. The demand for money curve shows that there is an inverse relationship between the quantity of money demanded and the: a. quantity of money supplied. Keynesians identify three principal motives for demanding money. 3. 15 To unclutter the argument, Keynes seems to have decided to shed light on the speculative motive to demand money… Speculative demand for money stems from uncertainty about the direction of changes in interest rates. The speculative demand for money This demand for money differs from the other two. 2. The demand for money is the amount of money individuals in an economy wish to hold at a particular point in time. However, money does not possess any utility to directly satisfy the consumers. ANSWER: B NOTES: REF: 172. Liquidity preference depends on the demand for money in Keynes's general theory in three motives: the transactions motive, the precautionary motive and the speculative motive.Because the nature of currency substitution is the rise of foreign currency demand and the decline of the demand of local currency, the reason for the change of foreign currency demand is the same as the reason of money … 4. In other words, the higher the interest rate, the lower the speculative demand for money. ADVERTISEMENTS: Some of the major motives for which money is wanted by the people are as follows: (a) Transaction Motive (b) Precautionary Motive (c) Speculative Motive. when the interest rate decreases. In Keynesian monetary theory such expectations are important. Factors Which Increase the Demand for Money 1. On the other hand, the money demand (MD) curve is downward sloping since an increase in the interest rate the speculative demand for money falls. 3.3 Speculative Motive for Holding Money Now, in addition to the transactions motive, there is one other reason why people have a demand for holding money balances. The Demand for Money . The definition of the financial term speculative demand (for money). The component of the demand for money that arises from the aim of gaining from expected changes in interest rates. This is called the speculative motive. Precautionary motive for holding money refers to the desire of the people to hold cash balances for unforeseen contingencies. because these goods possess utility. People demand commodities such as rice, wheat, clothes, etc. Speculative demand (for money) The need for cash to take advantage of investment opportunities that may arise. In this line of reasoning, what Keynes really aimed at in the GT was to show how the interaction between supply of and demand for money could end up determining an interest rate that was too high to allow the investments necessary to reach full employment to be realised. Transaction demand for money is the holding of money to meet the everyday expenses of a person. Speculative Demand for Money and Asset Prices. Speculative Demand for Money- The cash held under this motive is used, to make Then, why do […] The transactions and precautionary motive relate to the function of money as a medium of exchange, whereas a speculative demand for money is based on the expectation of making a speculative gain and avoiding a speculative loss. Money: Demand. Constancy of national income implies fixed demand for money for transactions and precautionary purposes. A reduction in the interest rate. According to Keynes, there are three major motives underlying the demand for money - 1. In Keynesian economics an investor can hold money or bonds. The speculative motive only explains the demand for M2 money rather than M1 money. sickness among others. C. Income motive. Quick Reference. c. price level. Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. b. gross domestic product (GDP). The speculative demand for money refers to the demand for money that people hold as idle cash to speculate with the aim of earning capital gains and profits. They are the: a. transactions demand, precautionary demand … The Demand Curve for Money. Putting those three sources of demand together, we can draw a demand curve for money to show how the interest rate affects the total quantity of money people hold. A rise in uncertainty about the future and future opportunities. transactions, precautionary, and speculative. d. interest rate. A sufficient condition for a more elastic demand for money under sticky expectations is that the Pratt-Arrow coefficient of relative risk aversion be either constant or decreasing in wealth. Find more finance definitions inside the PFhub glossary your Personal Finance Hub. Precautionary demand for money is the amount of money held by a person for contingency purpose. Transactionary motive relates to the demand for money to satisfy daily basic human needs (food, shelter & clothing), while precautionary motive relates to demand for money to cover for unexpected future events e.g. Keynes argued that when interest rates are low, the demand for money is greater. Precautionary Demand for Money- It is necessary to be cautious about future which is uncertain. According to the speculative demand for money, people will hold money instead of bonds According to Keynes's liquidity preference theory, the three motives for holding money are. Speculative motive: Some people hold cash to invest on shares, debentures, gold, immovable properties, etc. People hold money mainly for three reasons, transaction motive, precautionary motive, and speculative motive.
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