Question

Use the Baumol–Tobin model to explain how each of the following events would change the demand...

Use the Baumol–Tobin model to explain how each of the following events would change the demand for money:

War breaks out, making it dangerous and more costly to travel.

The rate of inflation increases and is expected to continue to increase.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The Baumol–Tobin real demand for money can be expressed as -

where -

1. P is price.

2. Y is real output

3. Md is nominal demand for money

4. is transaction cost

5. i is interest rate (or opportunity cost of holding money)

a. If war breaks out, then they will want to hold more cash and hence transaction cost ( ) will increase as  people will find it dangerous and more costly to travel.

b. If rate of inflation increases then people will need more money to buy the same quantity of good. Hence the demand for money will increase as Price level (P) will increase.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Baumol Tobin Model In class, we derived the Baumol-Tobin money demand function under the assumption that...
Baumol Tobin Model In class, we derived the Baumol-Tobin money demand function under the assumption that at the beginning of each period, the individual receives his income in the form of an interest-bearing bank deposit. Suppose instead that the individual receives his income in his hand. The individual can still make trips to the bank and deposit money in an interest-bearing account. The only difference with the setting we discussed in class is that at the beginning of each period...
For each of the following events, describe the shift in the supply and/or demand curve for...
For each of the following events, describe the shift in the supply and/or demand curve for bonds, and describe the impact on the price of bonds and the interest rate. Use graph to explain to your answer a. peoples wealth decreases b. the volatility in stock market increases c. There is an increase in expected inflation d. A business cycle contraction occurs.
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the...
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I,TB. assuming the government responds to maintain a fixed ex-change rate. A. Foreign income decreases. B. Investors expect a depreciation of the home currency. C. Private consumption increases exogenously.. D. The money demand increases.
For each of the following events draw a diagram illustrating the demand and supply of bonds...
For each of the following events draw a diagram illustrating the demand and supply of bonds and indicate how the equilibrium price and quantity would be affected: a)   Expected inflation rises. b)   An increase in brokerage commissions on stocks                                                                                                                                                          c)   Business people become more pessimistic about prospective investment projects. PLEASE SHOW YOUR WORK ON HOW YOU GOT EACH ANSWER (INCLUDING STEP-BY-STEP CALCULATIONS)!
Which of the following events would shift money demand to the left? a. an increase in...
Which of the following events would shift money demand to the left? a. an increase in the interest rate or an increase in the price level b. an increase in the interest rate, but not an increase in the price level c. an increase in the price level, but not an increase in the interest rate d. neither an increase in the interest rate nor an increase in the price level Please explain why it is not an increase in...
Use the AS/AD model to predict how each of the following shocks would likely affect real...
Use the AS/AD model to predict how each of the following shocks would likely affect real aggregate income (Y), the overall level of real interest rates (r), and the price of goods and services (P) in the long run, all else equal. In each case, be sure to make a long run prediction (up, down, or no change) for all three variables, and illustrate your predictions with an IS/LM diagram and a supply/demand diagram for the goods market. a.Government purchases...
Explain how each of the following events changes the demand for or supply of airline tickets....
Explain how each of the following events changes the demand for or supply of airline tickets. Roughly draw demand-supply cross diagrams to illustrate the effects on the equilibrium price of airline tickets. (No numbers are required.) The price of jet fuel rises. 2 marks. The price of a kilogram of luggage increases. 2 marks.
Explain how each of the following events would affect the supply of loanable funds curve: 1....
Explain how each of the following events would affect the supply of loanable funds curve: 1. The economy is in a recession, so people's disposable income is lower. 2. The stock market is booming so people's wealth is higher. 3. The future looks a bit grimmer, so expected future income is lower. The real interest rate increases.
Use the supply and demand model to illustrate how each of the following affects the market...
Use the supply and demand model to illustrate how each of the following affects the market for cocoa beans, ceteris paribus. Briefly discuss, and state the change in price and quantity. a. A blight on cacao trees kills of much of the crop in Latin America. b. The price of carob increases. c. Workers organize into a union and get higher wages for farming Cocoa. d. Chocolate is clinically proven to prevent Alzheimer’s disease. e. The price cocoa beans are...
Use the Supply and Demand Model to explain the changes in equilibrium price and equilibrium quantity...
Use the Supply and Demand Model to explain the changes in equilibrium price and equilibrium quantity in the market for Ford F150 Pickup Trucks. Make sure to include the following information in each part of your answers: 1. Which curve shifts 2. Which direction it moves 3. What is the impact on equilibrium prices and equilibriums quantities as a result of this shift Explain each of the following events separately and then explain what happens if they occur at the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT