transaction demand for money

Question 1

what does the Baumol model address?

Answer 1

the model addresses the demand for money by considering the need for transactions and the associated costs

Question 2

what are the key assumptions for baumols model?

Answer 2

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

Question 3

what are the transaction costs in the baumol model?

Answer 3

calculated as the total cost of making withdrawals over a given period

Question 4

what is the opportunity cost of holding money ?

Answer 4

represents the forgone interest that could have been earned if the money was kept in a savings account

Question 5

what is the formula for Baumols demand for money

Answer 5

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