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Unit-14: Contribution of Boumol and Tobin

in comparison to transaction amount. When the amount for transaction will be larger, then brokerages Notes
will be comparative lesser. “The minimum brokerage on purchasing bonds of $1000 will be expensive.
The minimum brokerage on purchasing bonds of $1000000 will be negligible. So however bigger will be
the amounts of total transactions, the brokerage will be as lesser, and the optimal withdrawals will be
done similar times.” It happens because of scale savings in the use of cash management or money.
This means that the average cost of transaction on higher levels of income i.e., brokerage is comparatively
lesser. As the income increases, the transaction demand of money is also increased but this increase
in less quantity in comparison to increase in income. If income increased four times, then optimal
transaction remaining is doubled only. Because Boumol considers the income-flexibility ½ (half) of
money demand, therefore the proportion in which the income will increase, money demand will also
increase in that proportion. It happens because of scale savings. Because of increment in income when
the amount of money invested in transaction is comparatively large then the scale savings encourage
more investment in bonds. In this stock theory of money demand Boumol also focuses on this thing
that money demand is a demand for actual remaining. Because the value of average cash availabilities
is K/2, therefore the demand of remaining for actual transaction will be as following:

M D = K 2bY
P 2 r

1 2bY
M = P
D
2 r …(3)
Where M is money demand and P is price level. It is known from equation (3) that the demand
D
of transaction remaining is directly "proportional to square root of quantity of transactions and is
inversely proportional to the square root of interest rate.” It means that there is a direct and equal
proportional relation between changes in level and transaction demand of money. If the structure of
firm’s purchase is unchanged, then optimal cash remaining (Y) will be increased in that proportion
in which price-level (P) will increase. If the price-level will be double, then the price value of firm’s
transaction will also be double. When all the prices will be double, then brokerage (b) will also be
double. “Consequently it will be desirable to keep more cash remaining for saving from investments
and withdrawals and those costs.” On increasing the price value and brokerage of such transactions
the optimal demand of money increased in that proportion in which price-level increased. So the mean
of analysis of demand of actual remaining presented by Boumol is that there is no money-assumption
in money demand for transaction.

Its Superiority over the Classical and Keynesian Approaches

Boumol’s Stock Theoretic Approach related to transaction demand of money is better than Classical
and Keynesian Approach in the following points:
(i) The Theory cash remaining amount of money starts with this consideration that there is
linear and direct proportionality relation between transaction demand and income level.
Boumol has cleared that it is not right to accept this relation. There is no doubt in this when
income is increased, then transaction demand is also increased but because of scale savings
in the use of cash management or money this demand increased in small proportion in
comparison to income.
(ii) One superiority of Boumol Theory is that where Keynes approach was that transaction
demand of money is inflexible there Boumol proved that transaction demand of money is
flexible.
(iii) Boumol’s Approach analyses the transaction demand for actual remaining, and finally forces
on the lack of money illusion.

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