Precautionary Motive People also hold money as a precautionary measure in case of an emergency. Precautionary money balances are generally held in some ratio to income to provide for a given standard of living in an emergency. This is akin to saying that the average family of four living in an urban area should have on hand six months income in liquid assets as a contingency. Additional precautionary balances will be held depending on the state of expectations about the future and the degree of uncertainty. Speculative Motive People often hold money just for speculating on asset prices.
Asset prices vary inversely to their fixed returns.
For example, when interest rates are low, bond prices are high. Since no additional capital gains can be made from holding bonds, individuals will sell bonds and accumulate money balances. As interest rates rise, bond prices fall and the opportunity cost of holding idle money balances increases. In the Keynesian system, where individuals have a choice only between cash and bonds, they hold either all cash or all bonds and the demand for money is perfectly elastic at i min . In the real world, not all individuals think alike or hold identical expectations.