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Unit-14: Contribution of Boumol and Tobin

another place of the firm... It can be invested in the beneficial securities.” Similarly, the second way Notes
to keep the remaining money is bond on which interest is given. To gain most benefit from its assets
firm will always try to save the minimum cash for transactions. The interest rate on the bond will be
as higher; firm will keep as lesser transaction remaining.

Figure 14.1

Notes Keynes considers transaction demand of money as a function of income level and
also as a linear proportion relation between transaction demand and income.

Boumol starts with considering that any firm per time-period, as there is the income of Y dollars in a
year of which it spend with a constant rate in that year. So it would be very beneficial to buy the bonds
from its inactive funds for a firm. Bond can be sold on the need of cash for any transaction.
The structure of cash availability and bonds availability of the firm is shown in figure 14.1. Let us
consider that firm has $1200 of which it has to spend during that year from a constant rate per four
months from this amount on keeping $400 for transaction it purchases the bonds of remaining $800.
The maturity of purchases half bonds is 1/3t (four months) and that of rest half bonds is 2/3t (eight
months), let us consider that the size of amount gained on selling k bond is equal to half of the amount
gained from selling average cash available bonds (1/2k) of the firm. On giving these considerations,
firm purchases the bonds of it’s 2/3rd income ($800) in t=0 time and rest 1/3 ($400) keeps in cash, as
shown in figure. The first half bonds ($400) purchased on 1/3t time are matured which it sold till time
2/3t for cash. Rest bonds are matured on time 2/3t of which firm sells so that could transact till the t
1
time. The remaining cash is zero on time t and firm is ready to cash gain in New Year.
1

Did You Know? Boumol’s analysis also targets one more important fact for the behave of
demand of transaction remaining.

It is must to solve this problem that the cost of keeping the remaining cash throughout the year should
be kept minimal. The interest cost and non-interest cost are also included in keeping the remaining
cash. As we have seen earlier, interest costs are in the form of chance cost. Because when a firm keep
the cash for transaction, it has to leave its interest income. On the other side, for changing the cash

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