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© 2014 Pearson Canada Inc.$- Explain the speculative motive for holding money in Keynes's liquidity preference theory
Answer: Keynes took the view that people also hold money as a store of wealth and he called
this reason for people holding money the speculative motive. Since he believed that wealth is
closely tied to income, the speculative component of money demand would be related to income.
However Keynes looked more carefully at the factors that influence the decisions regarding how
much money to hold as a store of wealth, especially interest rates. He divided the assets that can
be used to store wealth into two categories: money and bonds. Keynes assumed that the expected
return to money was zero because in his time unlike today, most chequable deposits did not earn
interest. For bonds there are two components of the expected return: the interest payment and the
expected rate of capital gains. If interest rates are below some normal value then people expect
interest rates on bonds to rise and so expect to suffer capital loses on them. As a result the
demand for money will increase.
Diff: 2 Type: SA Page Ref: 533
Skill: Recall
Objective List: 21.2 Define the theories of the demand for money
21.4 Portfolio Theories of Money Demand
The theory of portfolio choice says that the demand for an asset is ____ related to
____.
A) positively; wealth
B) negatively; expected return
C) negatively; wealth
D) positively; risk.
Answer: A
Diff: 1 Type: MC Page Ref: 534
Skill: Recall
Objective List: 21.1 Describe how the demand for money is determined
Currency and chequable deposits are said to be ____.
A) dominated assets
B) risky assets
C) interest bearing
D) income
Answer: A
Diff: 1 Type: MC Page Ref: 535
Skill: Recall
Objective List: 21.2 Define the theories of the demand for money