SSC CGL 2024 Tier-I · 9 September 2024, Shift 2 · General Awareness · Question 20 of 100

Text as printed on a candidate's response sheet for this shift; answer per SSC's tentative key as marked on that sheet. Solution last reviewed 5 September 2026.

Where this paper and its answers come from

SSC does not publish CGL question papers or a public answer key. The questions and options here are reproduced as printed on a candidate's own response sheet for this shift — the Commission's text, unchanged. Each answer is SSC's tentative key as marked on that sheet; SSC allowed challenges to it and never publishes a final key. The solutions are written by UnlockIAS.

What is the relationship between interest rate and demand for money?

(a)Inverse
(b)Direct
(c)No relationship exists
(d)Proportionate

Answer

Why

Correct — A. The interest rate is the price of holding cash — what you give up by keeping wealth as money instead of as an interest-bearing asset.

When the rate rises, that sacrifice grows, so people economise on idle balances and move into bonds.
When the rate falls, holding cash costs little, and balances build up.

Demand for money therefore moves inversely with the interest rate, which is why the money-demand curve slopes downward against r.

Why the others are wrong

(b)
Direct — Direct would mean people choose to hold the most idle cash exactly when the interest forgone is highest — the reverse of the opportunity-cost logic.
(c)
No relationship exists — This is the classical simplification: money demanded only to carry out transactions, and so a function of income alone. Keynes's contribution was to show that the interest rate matters too.
(d)
Proportionate — Money demand is roughly proportionate to income, not to the interest rate — and 'proportionate' still has the two moving together, so the sign is wrong as well.

Concept

Keynes's liquidity preference theory gives three motives for holding money.

The transactions and precautionary motives depend mainly on income — you hold more cash when you earn and spend more.

The speculative motive depends on the interest rate, and it supplies the inverse relationship.

Bond prices move opposite to rates. When rates are high, bond prices are low and expected to rise, so bonds are preferred to cash. When rates are low, cash is held rather than risk a capital loss.

Total demand is written Md = L1(Y) + L2(r).

At very low rates the curve flattens into the liquidity trap, where money demand is almost perfectly elastic and further monetary expansion fails to push rates down.

Key facts

Keynes identified three motives for holding money: transactions, precautionary and speculative.
Transactions and precautionary demand vary mainly with income.
Speculative demand varies inversely with the rate of interest.
Bond prices and interest rates move in opposite directions, which is the mechanism behind speculative demand.

Study next

Liquidity preference and the determination of the rate of interestQuantity theory of money and the Cambridge cash-balance approachMoney supply measures M1 to M4 and the money multiplier

Common traps

Confusing demand for money with saving. Saving responds positively to interest, while holding idle cash does not.
Arguing that a high rate 'attracts money'. That describes deposits earning interest, not money held as cash.

SSC keeps this to one line — a relationship to name, or 'speculative demand for money is a function of ___'. Fix the sign first, then the motive that produces it.

Related PYQs

No directly related past PYQ was found.