Page 127 - DECO402_Macro Economics

Macroeconomic Theory Ashwani Panesar, Lovely Professional University

Notes Unit-14: Contribution of Boumol and Tobin

Contents
Objectives
Introduction
14.1 Boumol’s Inventory Theoretical Approach
14.2 Tobin’s Portfolio Selection Model: The Risk Aversion Theory of Liquidity
Preference
14.3 It’s Superiority over Keynesian Theory
14.4 Summary
14.5 Keywords
14.6 Review Questions
14.7 Further Readings

Objectives

After studying this unit, students will be able to:
y Know Boumol’s Inventory Theoretical Approach,
y Know Tobin’s portfolio Selection Model.

Introduction

The base of Boumal’s analysis is that any firm or person keeps the optimal inventory under his
custody for transactions. He writes, “The meaning of remained cash of the firm can be considered
as that inventory of money of which it’s lord is ready to give in exchange of buying the labour, raw
material etc.”

14.1 Boumol’s Inventory Theoretical Approach

William Boumol has given important contribution in transaction demand of money presented by
Keynes. Keynes considers transaction demand of money as a function of income level and as a linear
proportion relation between transaction demand and income. Boumaol says the relation between
transaction demand and income is neither linear nor proportional but it happens when there are
changes in income, and then there are lesser changes from proportion in transaction demand of
money. Again, Keynes considered that transaction demand is interest inflexible. However, Boumol
has analyzed the flexibility of transaction demand of money.
The base of Boumal’s analysis is that any firm or person keeps the optimal inventory under his
custody for transactions. He writes, “The mean of remained cash of the firm can be considered as that
inventory of money of which its lord is ready to give in exchange of buying the labour, raw material
etc.” Remaining cash is kept so that income and expenditures don’t happen together. “But to the large
amount of capital in the form of remaining cash is very expensive. Because that money can be used in

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