In fact, this is a very delicate matter. How much interest rate will make people expect interest rates to fall in the future? This is just a hypothesis, which should be understood according to different situations.
I think the first one is right. In any case, the increase in interest rates will reduce the demand for money. As interest rates rise, the scale of savings will be greater than that of investment, and the demand for money will also decrease.
LM curve can be used to solve this problem. The combination of income and interest rate on the left of LM curve is the combination of demand less than supply, and the interest rate on the left is greater than the market equilibrium interest rate.
For example, if the original interest rate is 1% and the bond interest rate is 5%, some people will choose to hold bonds because the bond interest rate is high, but when the interest rate rises to 4%, the 5% bonds will not be so attractive, and many people will prefer to hold money for interest income because of liquidity (bonds generally have a long term).
In other words, the increase of interest rate is equivalent to the increase of money yield, so bonds are relatively less attractive, so people will sell bonds to hold money.
When the interest rate falls to a certain extent, the speculative demand for money will tend to infinity. Because the bond price almost reached the highest point at this time, as long as the interest rate rises slightly, the bond price will fall, and the bond purchase will have a great risk of loss.
According to Keynes's theory of liquidity preference (money demand), what are the three motivations for people to hold money?
There are three motivations for people's liquidity preference: trading motivation, cautious motivation and speculative motivation.
The money demand caused by trading motivation and cautious motivation is not directly related to interest rate, but a function of income, which is proportional to income; The demand for money brought by speculative motives is inversely proportional to the interest rate, because the higher the interest rate, the higher the opportunity cost of people holding money for speculation.
In fact, the three motives boil down to the influence of interest rate R and income I.
For details, please refer to the corresponding chapter of Gao Hongye's "Macroeconomics" AD-AS model.