In Keynes\'s analysis of the speculative demand for money, what will happen to m

Question

In Keynes's analysis of the speculative demand for money, what will happen to money demand if people suddenly decide that the normal level of the interest rate has declined? Why?

A.

Money demand will increase because as interest rates fall, the price of bonds falls. The relative decrease in the expected return on bonds makes money more attractive.

B.

Money demand will increase because people will want to borrow more money.

C.

Money demand will stay the same because the speculative component of the demand for money is viewed as insensitive to interest rates.

D.

Money demand will decrease because as interest rates fall, the price of bonds rises. The relative increase in the expected return on bonds makes money less attractive.

Explanation / Answer

When the interest rate fall below the normal level,people anticipate that the interest rates will go higher in future and bond prices will fall.This induces investors to sell the bonds at present in order to buy when they are selling at lower prices in future as of result of increase in interest rates.Money demand will decrease .

Speculative demand generates when people anticipate changes in interest rate or bond prices .

D

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