Question

In the Baumol-Tobin model, an increase in transaction costs reduces the number of times individuals exchange interest-bearing assets and money, thus lowering the demand for money. Explain statements is true or false

Answer 1

In the Baumol-Tobin model of demand for money, keeping other things constant, there is a direct/positive relation between transaction costs and demand for money. It means as the transaction costs increases, the demand for money increases and vice versa. The money demand function is as follows: by Money Demand = 2i Here, Y is the income i is the interest rate b is the transactions costs Thus, the statement that increase in transaction cost leads to lower money demand is "FALSE".