The Baumol-Tobin analysis suggests that
A)velocity is relatively constant.
B)the transactions component of the demand for money is negatively related to the level of interest rates.
C)the speculative motive is nonexistent.
D)velocity is unrelated to the transactions motive.

Question

Quizplus · Accepted Answer

The Baumol-Tobin analysis suggests that the transactions component of the demand for money is negatively related to the level of interest rates. This means that as interest rates rise, individuals and firms prefer to hold less money for transactions, as the opportunity cost of holding money increases. Therefore, they will try to minimize their money holdings and increase their use of credit or other payment methods.

The Baumol-Tobin Analysis Suggests That