Page 134 - DECO402_Macro Economics

Unit-14: Contribution of Boumol and Tobin

So the demand curve of money can be traced on the basis of figure 14.3. It is shown in figure 14.4 as Ls Notes
curve. Curve shows that interest rate falls from high level, then there is comparative less increment in
money demand. For example, when interest rate converts from r to r on reducing, then there is AB
10
8
increment in money demand which is less than OA. It’s reason is that risk averter wants to purchase
more bonds in comparison to money. But when interest rate falls on lower level as become r to r on
2
4
falling down, then there is a huge increment in money demand. This increment is CD in figure 14.4.
This money demand curve is not only related with all demands of money but related with speculative
demand of money.

Self Assessment
State whether the following statements are True or False:
7. However the interest rate will be larger, firm could expense as more in purchase the
bonds.
8. Boumol’s Approach analyses the transaction demand for actual remaining.
9. Tobin Theory depends on inflexibility of expectations of future interest rate.
10. Tobin considers his theory more satisfactory form of liquidity preference in comparison to
Keynesian Theory, logically.

14.3 It’s Superiority over Keynesian Theory

In comparison to the Keynes theory of liquidity preference of speculated demand of money, Tobin’s
Input list Selection Risk aversion theory is the best.
1. More Satisfactory: Tobin’s theory does not depend upon the inflexibility of expectations
future interest rates, but moves with this consideration that the expected value of capital profit
or loss is always zero on keeping the interest holder assets. Tobin considers his theory more
stisfactory from of liquidity Preference in comparison to Keynesian Thoeory, logically.
2. Diversified Input list: In comparison to Keynes theory this theory is also better in this thing
that it tells that people instead of only bond or money, can keep the mixed form of bonds
and money both as portfolio.

14.4 Summary

y 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 it’s inactive funds for a firm. Bond can be sold on the need of cash for
any transaction.

14.5 Keywords

y Theoretical Approach—Principle, Rule.
y Money Illusion—Illusion of money.
y Probability Distribution—Potential Destribution

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