Solution
Option 1 -> Transaction motive is a reason for holding money, not the basis for classification.
Option 2 -> Liquidity determines how easily money can be converted to cash, forming the basis for narrow and broad money classification.
Option 3 -> Speculative motive is another reason for holding money, not a classification criterion.
Option 4 -> Demand refers to the desire for money, not the classification system.
Hence, Liquidity -> The classification of money into narrow money (M1) and broad money (M2, M3, M4) is based on the degree of liquidity of financial assets. Narrow money includes the most liquid forms like currency and demand deposits that can be immediately used for transactions. Broad money includes less liquid assets like savings deposits, time deposits, and other near-money assets that cannot be immediately spent but can be converted to liquid form. The liquidity criterion measures how quickly and easily an asset can be converted into cash without loss of value. -> correct