Speculative demand for money and rate of interest are inversely related. Justify.
A rise in the market rate of interest leads to decrease in the market value of the bond. This is called a capital loss to the bond holder. In this situation, people will try to sell the bond and hold cash. Thus, the interest rate and bond prices give rise to the speculative demand for money.
When the market rate of interest is very high, people expect it to fall in future, and hence anticipate capital gains from bond holding. Then, people convert their money into bonds. Thus, speculative demand for money is low.
As the interest rate reduces, people expect it to increase in the future, and thereby results in capital loss. Then people convert their bonds in to money which gives rise to high speculative demand for money.
Therefore, speculative demand for money and the rate of interest are inversely related.