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Unformatted text preview: Speculative Motive From Last Time • Why are there two different interest rates, one on savings and another on payments such as credit cards? Banks earn a profit by borrowing from depositors at a low interest rate and lending the funds out at a higher interest rate. These profits compensate the bank for its services as a financial intermediary. • At first you said that velocity, V, is constant, then I think you contradicted yourself. How could it be constant through recessions, depressions, and rapid growth periods? The quantity theory of money assumes that the velocity of money is constant, but clearly it is not. Liquidity Preference The speculative motive looks at the demand for money as an asset. Investors are seen as switching their asset holdings back and forth between money and bonds. The expected return on money is assumed to be zero. The expected return on a bond consists of the interest payment plus expected capital gains. Investors are assumed to have in mind a "normal" interest rate. This is expected capital gains....
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