transaction demand for money Flashcards
what does the Baumol model address?
the model addresses the demand for money by considering the need for transactions and the associated costs
what are the key assumptions for baumols model?
money is needed for purchases but it doesn’t generate interest, unlike savings. there are costs associated with withdrawing money from savings account, including fixed and variable component
what are the transaction costs in the baumol model?
calculated as the total cost of making withdrawals over a given period
what is the opportunity cost of holding money ?
represents the forgone interest that could have been earned if the money was kept in a savings account
what is the formula for Baumols demand for money
M= √[(B_0 * Y)/2R] where the demand for money increases with transaction costs increases with planned expenditure and declines with the interest rate on the savings account R
what is the formula for the total transaction costs?
what is the formula for the average demand for money?
M=W/2
how can the money over time after a withdrawal be represented graphically?
what is the formula for the averagee opportunity cost of holding money?
how is the optimal number of withdrawels determined?
differentiate the total costs with respect to N to find the optimal number of withdrawels
how is the optimal amount withdrawn determined?
what is the formula for the average money holding and how is it determined?
what is the formula for the average investment?
what does the average investment formula inform about the banks transaction costs?
what is velocity in the baumol model?
is the velocity of money constant?
no, velocity of money declines in a recession
