Question

In the Keynesian system, the speculative demand for money arises because of

• A. uncertainty of future interest rates
• B. uncertainty regarding bond prices and associated capital gains
• C. unexpected out-of-pocket expenditure
• D. the gap that emerges between income and sudden eventual expenditure

Answer 1

The Correct Option is A, B

In the Keynesian system, the speculative demand for money is primarily driven by two key factors: uncertainty of future interest rates and uncertainty regarding bond prices and associated capital gains. Let's explore these factors:

• Uncertainty of Future Interest Rates: In the Keynesian framework, individuals and institutions hold money as a safeguard against the uncertainty of future interest rate movements. When interest rates are expected to rise, people anticipate a drop in bond prices, leading to potential capital losses. To avoid these losses, they prefer to hold liquid cash rather than invest in bonds.
• Uncertainty Regarding Bond Prices and Associated Capital Gains: Bond prices are inversely related to interest rates. If there is uncertainty regarding the future performance of interest rates, there is also uncertainty in bond prices. Investors may choose to hold money to avoid the risk of declining bond prices, which can result in capital losses. The speculative demand for money, therefore, increases as individuals try to protect their wealth from unpredictable fluctuations in the bond market.

These elements highlight the speculative motive in the demand for money as posited by John Maynard Keynes, encompassing precautionary actions taken by economic agents during times of financial uncertainty.