Question

Explain the Baumol and Tobin further developments in the Keynesian money demand
approach

Answer 1

Keynesian money demand approach which emphasized Only transactions demand for money

Draw back of this approach is that according to Keynesian people hold there assest in either all money or in all bond which is unrealistic in nature. Because people can hold their assets In both bond and money.

Here we discuss contributions of Baumol and Tobin in futher development of Keynesian money demand approach.

1) :- tobin portfolio approach to demand for money.

According to him that the individual should keep the portfolio of assest that consist both bond And money.

According to him when assets are divided both in bond and money. wealth are in balance form.

According to him individual people are uncertain about future rate of interest , so maintaining balance is important because higher assest in, bond earn higher return but also bear higher risk too.

Baumol analysis of transaction demand

This theory is mainly realed with those person who earn monthly income like salary, end of months in the form of cash or in cheque.

According to him using allMoney on consumption is not right. because with consumption of that money decrease the quantity of money to. and at the end of month individual have left nothing which created less interest in individual.

According to him if person only use his half money as daily consumption and put half money in saving accounts and get interest of 5 % is much better than above.

• so according to him saving account is secure and safe and yield some interest too unlike Keynesian theory approach and Tobin theory approach which states that transaction demand for money depend only one rate of interest.