In the Baumol-Tobin analysis of transactions demand,scale economies imply that an increase in real income increases the quantity of money demanded ________,while an increase in the price level increases the quantity of money demanded ________.
A)proportionately;less than proportionately
B)more than proportionately;proportionately
C)less than proportionately;proportionately
D)proportionately;more than proportionately

Question

Quizplus · Accepted Answer

In the Baumol-Tobin model, scale economies imply that an increase in real income increases the quantity of money demanded proportionately because a larger income necessitates larger transactions, requiring more cash to be held. On the other hand, an increase in the price level increases the quantity of money demanded less than proportionately because a higher price level means that each transaction requires more cash, but this effect is offset by a reduction in the number of necessary transactions due to the higher prices. Therefore, option C is the correct answer.

In the Baumol-Tobin Analysis of Transactions Demand,scale Economies Imply That