Explain the Keynesian Speculative Demand for Money.

Explain the Keynesian Speculative Demand for Money. 

Ans. Speculative Demand: (or Asset Demand) for speculative financial transactions. (To simplify analysis, Keynes assumed existence of just 2 financial assets cash and consoles: interest bearing, non-redeemable bonds). Keynes argued inverse relationship between bond prices and interest rates. Individuals will each have their own expectations of a normal rate of interest rate with which they will expect the market rate ultimately to coincide. At a high interest rate, individuals will expect interest rates to fall and bond prices to rise. To benefit from the rise in bond prices individuals will use their speculative balances to buy bonds. Thus, when interest rates are high, speculative balances are low. At low interest rates, individuals will expect interest rates to rise and bond prices to fall. To avoid the capital losses associated with a fall in bond prices, individuals will sell their bonds and add to their speculative cash balances. Thus, when interest rates are low, speculative balances will be high. Ultimately, interest rate reached where no one thinks it can go higher universal expectations of a fall idle spec cash balances zero, as everyone will try to move into bonds in expectation of making a capital gain. Ultimately, minimal interest rate such that universal expectation of a future rise here no call for bonds with demand for idle balances infinite up to total wealth. (Liquidity trap) -Inverse relationship between rate of interest and the speculative demand for money. 

(a) L1 Transactions and Precautionary MD 

(b) Speculative MD 

(c) Total MD (Individual Speculative MD rests on assumption that individuals have a concept of normal interest rate: if current market interest rate is more than normal, expectation that interest rates will fall/bond Ps will rise so All asset cash to buy bonds so spec cash demand zero. If converse, spec cash demand infinite: so implies that individuals either hold cash or bonds but not both). It is shown with the help of diagram given below: