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Speculative motive

Speculative motive - of their distinct approach to demand...

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Speculative motive: In determination of the rate of interest Keynes has introduced speculative motive which creates demand for hoarding money or liquidity. Therefore his interest rate theory is known as liquidity preference (LP) theory . Under the LP theory, rate of interest is a pure monetary phenomenon. Before Keynes the rate of interest was explained as a real phenomenon. The classical theories are based on abstinence or the waiting involved in the act of saving . In other words, the activity of saving causes some sacrifice or inconvenience and rate of interest is the price paid to compensate for this. But Keynes has regarded savings as a negative activity which does not require any compensation. Yet rate of interest is positive because it helps to dissuade speculators from hoarding liquid assets. This difference in the classical and Keynesian approaches arises because
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Unformatted text preview: of their distinct approach to demand for money or liquidity . The classical economists assume that Transactions motive and Precautionary motive are the only two motives to be satisfied by the demand for money. But Keynes observed that in the modern economy there is a class of speculators who hoard large quantities of liquid resources. The demand for money made by speculators is meant for investing in securities when market conditions are favorable and to withdraw the demand by selling securities when it is profitable. Therefore the Speculative motive creates demand for liquidity with an intention of making capital gains out of fluctuating market conditions for securities. Speculative demand for money is Keynes’ novel concept and it has caused a fundamental change in the traditional monetary theory....
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