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The Fundamentals of Money and Financial Systems by Shahdad Naghshpour

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CHAPTER 3

Portfolio Balances

Introduction

Early economists studying the demand for money focused on the transaction motive. Keynes pointed out that there are at least three motives for demand for money: transaction, precautionary, and speculative.1 In Chapter 2, we discussed the transaction motive of demand for money from a nonquantity theory perspective. In this chapter, we will focus on the speculative motive for demand for money. Analyzing the demand for money from the perspective of different motives provides an insight about the relationship between key financial variables such as interest rate and velocity with money.

In the absence of inflation, money does not lose its value, but some assets, such as treasury bonds, earn interest in addition ...

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