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    Question

    In the Liquidity Preference Theory, the demand for money

    for speculative motives is:
    A Directly related to the level of income. Correct Answer Incorrect Answer
    B Directly related to the price level. Correct Answer Incorrect Answer
    C Inversely related to the rate of interest. Correct Answer Incorrect Answer
    D Unrelated to expectations about future interest rates. Correct Answer Incorrect Answer
    E Fixed and constant. Correct Answer Incorrect Answer

    Solution

    Keynes posited that the speculative demand for money is held to take advantage of future changes in bond prices, which are inversely related to interest rates. When interest rates are low, people expect them to rise (and bond prices to fall), so they prefer to hold liquid money. When interest rates are high, they prefer to hold bonds. Hence, it's inversely related.

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