A major point of the Baumol-Tobin model of the transactions demand for money is

Question

A major point of the Baumol-Tobin model of the transactions demand for money is that they show that the

demand for money is related to income.

velocity of money is constant.

fraction of income that people wish to hold in the form of money is constant.

interest sensitivity of the demand for money is based on a transactions motive shared by most people.

Please Explain

demand for money is related to income.

velocity of money is constant.

fraction of income that people wish to hold in the form of money is constant.

interest sensitivity of the demand for money is based on a transactions motive shared by most people.

Explanation / Answer

velocity of money is constant.

While the Baumol-Tobin model provides a microeconomic explanation for the form of the money demand function, it is generally too stylized to be included in modern macroeconomic models, particularly dynamic stochastic general equilibrium models. As a result most models of this type resort to simpler indirect methods which capture the spirit of the transactions motive. The two most commonly used methods are the cash-in-advance model (sometimes called the Clower Constraint model) and the money in the utility function model (sometimes referred to as the 'MIU' or the Sidrauski model). In the cash-in-advance model agents are restricted to carrying out a volume of transactions equal to or less than their money holdings. In the MIU model, money directly enters agents' utility functions, capturing the 'liquidity services' provided by money

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