Which of the following motives were articulated by J. M. Keynes for holding cash?

A. Precautionary
B. Return generation
C. Speculative
D. Investment
E. Transaction

Choose the correct answer from the options given below:

Correct option is C

J. M. Keynes, in his Liquidity Preference Theory, identified three primary motives for holding money (cash):

• Transaction motive (E): Individuals and businesses hold money to meet day-to-day expenditures. This is the demand for liquidity for regular transactions like paying rent, salaries, or purchasing raw materials.

• Precautionary motive (A): Money is held to meet unexpected contingencies or emergencies, such as medical expenses, economic shocks, or sudden repairs.

• Speculative motive (C): People might hold cash to take advantage of future investment opportunities or changes in interest rates. For example, when bond prices are expected to fall (and interest rates rise), individuals prefer to hold cash rather than invest immediately.

Keynes did not include motives like "return generation" or "investment" under the liquidity preference theory, as those relate more to the use of money rather than reasons for holding it in liquid form.

Information Booster:

Keynesian Liquidity Preference Theory is foundational in monetary economics. According to Keynes:

• Money is not held for return but for liquidity and flexibility.

• The speculative motive links monetary demand to interest rate expectations, forming a basis for the downward-sloping LM curve in IS-LM analysis.

• These motives explain how individuals allocate wealth between money and interest-bearing assets, affecting the overall demand for money in the economy.

It plays a crucial role in Keynesian monetary policy and in explaining how changes in interest rates impact aggregate demand.

Additional Knowledge:

B. Return generation:
This motive implies that cash is held for earning a return, which contradicts Keynes’ theory. According to him, cash does not generate returns; instead, it is held for security, convenience, or flexibility.

D. Investment:
Investment is typically a use of money, not a motive for holding it. Keynes categorized investment decisions separately from liquidity preference. Holding money for future investment fits under the speculative motive, but "investment" per se is not named as a separate motive in his framework.