Which is the most accurate statement regarding the demand for money?
- Precautionary money demand is directly related to GDP.
- Transactions money demand is inversely related to returns on bonds.
- Speculative demand is inversely related to the perceived risk of other assets.
Answer is A, but Precautionary Demand should be inversely related to GDP. Then why it says directly related?
Transaction-related
Money balances held to finance transactions are called transactions money balances .As real GDP increases, the size and number of transactions will increase, and the transaction-related demand for money increases.
Precautionary
More like an emergency fund. Precautionary money balances are held as a buffer for unforeseen events. These balances are also proportional to growth in GDP.
Speculative
As the name indicates, it is the demand to hold money in anticipation that assets will
decline in value in future as the current risk in those assets is high. It is directly
proportional to perceived risk; if perceived risk is high, people choose to hold money
rather than invest it.
It is inversely proportional to return on assets; as return increases, people choose to invest money rather than hold it for speculative purposes.