Inventory Approach to the Demand for Transaction Balances:
An extension of the basic transaction demand for money theory is that set out by Baumol (1952) and further extended by Tobin (1956). The major underpinning of the inventory approach is that individual’s face a trade-off, between the liquidity offered by money balances, and the interest offered by bond holdings. The models determinants are therefore the nominal interest rate, the level of real income that relates to the desired number of transactions and the transaction costs of transferring money to bonds and vice versa, which are assumed fixed.
An individual’s amount and timing of expenditure is assumed to be known with certainty, and as such payments are spread throughout the income period, with T days producing an expenditure of 1/T∙(individual income per period). Bonds are also assumed to exist, where holding money assets incurs an opportunity cost of forgone interest. Finally the income period of T days is further divided into K equal intervals, each lasting T/K days.
At the beginning of the income period, to ensure adequate money holding for consumption transactions, 1/K of income is retained as money. The remaining balance (K-1/K ∙Y), is used to purchase interest bearing bonds, producing an average money holding of ( Y/2∙1/K). A further factor in the model is that the cost of transacting money out of bonds and vice versa is bK, therefore the less time the average cash balance is held, the more frequently bonds are sold and the higher overall transaction costs; the less money balances that are held, the more brokerage costs will be.
The inventory approach produces five main predictions from its deductions. The quantity of money in an economy is determined by ...
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With differing economies and the growth of specie and paper money, Brands argues that the basis of knowledge about the money system of this time lays a foundation for how Carnegie, Rockefeller, and others were able to manipulate the market and gain wealth. Leading into price manipulation by those in corporate
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People tend to try and predict what their future needs will be in order for them to be able to satisfy their current and future wants. The two-period model of intertemporal choice tries to interpret based on the current time period (e.g. this month) and a prediction of the future time period (e.g. next month) what consumers will be able to spend, borrow or save according to their levels of income and interest rates. In this assignment however we are mostly concerned on the changes of interest rate and specifically the impact an increase in the level of interest rates would have to consumers who are either savers or borrowers in the first period and how would that affect their consumption levels.
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The idea of the money growth rule is contingent upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As stated earlier, one can see a relation between money and inflation. Presented above is series data that displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a pattern begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can have upon an economy’s inflation rate.
demand for funds quickly became powerful and widespread. During these periods of high demand, banks from across the nation called on the central banks to supply the funds (Federal Reserve System 5th ed pp. 10-11).
The elasticity of demand is measures the rate of response of quantity demanded due to a various factors, especially Price. In this report we are only considering the Elastic demands and the variable factor which involves money. Based on the assumption, ceteris paribus, there are different elasticity of demand where the responsiveness of quantity demanded is effected by the variation in factors like price, income and price of related goods.
Money has evolved with the times and is a reflection of the progress of man. Early money was a physical commodity, grain, gold or silver. During the vital stage, more symbolic forms of money such as certificates of deposit, bank notes, checks, letters of credit, bonds and other forms of negotiable securities came into prominence. Social development transformed money into a trust, “In God We Trust' it says on the back of the ten-dollar bill.” (The Ascent of Money, 27)
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Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations.
The invention of money was a major improvement in peoples’ lives. In the past, people usually had to travel all day to find the person who is willing to exchange their goods. In addition, the goods people want to exchange did not have the standard value of measurement. This led to unequal exchanges. Furthermore, it is not convenient to carry heavy goods from one place to another for an exchange. To solve these issues, money will be the only solution. Later, people tend to develop money from cowry shells to credit cards for the convenience and to improve their society.