What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances? (Check all that apply.) A. Transactions motive. B. Precautionary motive. C. Speculative motive. D. Price level motive. E. Income motive.

The correct answers are: B. Precautionary motive; D. Price level motive; E. Income motive.

Explanation:

Keynes classified the three reasons why economic subjects wish to maintain liquid balances:

- Reason transaction: covers the liquidity necessary to deal with everyday transactions. People need to keep a certain amount of money to perform ordinary transactions. As a general rule, the average monetary balance that a person must maintain for transaction purposes decreases as the frequency of his income increases. It can also be affirmed that the monetary balance that citizens, as a whole, wish to keep for transaction purposes depends directly on the level of income. It does not seem to be very sensitive to interest rates.

- Caution reason: to make unforeseen contingencies. Keynes thought that it did not depend on the interest rate, although later some of his disciples such as Harrod have questioned this statement.

- Reason for speculation: the investor who expects the interest rate to rise in the short term and therefore decreases the price of the bonds, will prefer to keep his savings in the form of money while waiting for that interest rate increase to take place. As long as the expected interest is higher than the current one, investors will keep their savings in the form of money, so the demand for money due to speculation will be inversely related to the interest rate. The higher this is, the less likely it is that the investor expects the interest rate to rise in the future. This reason for the demand for money was a complete innovation of Keynes that was not contemplated by the classics, which therefore denied any relationship between the demand for money and interest rates.