Briefly outline why Baumol’s “The Transactions Demand for Cash” is a further development in the Keynesian...
Briefly outline why Baumol’s “The Transactions Demand for Cash” is a further development in the Keynesian approach to the demand for money.
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Answer
According to the transaction theory, money is a dominated asset people hold money unlike other assets, to make purchases. ... Baumol-Tobin model shows that demand for money depends positively on the income level and negatively on the interest rate. This model is explained in terms of assets.
Transaction Demand. The amount of money needed to cover the needs of an individual, firm, or nation. That is, transaction demand for money is a measure of how much of a certain currency people need in order to buy the goods and services they use.
Keynes treated money also as a store of value because it is an asset in which an individual can store his (her) wealth.
To Keynes an individual’s total wealth consisted of money and bonds.
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B) Suppose the interest rate is
at iA. Explain how firms and households attempt to
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