Which of the following is a feature of the 'Baumol-Tobin Model' of money demand?
A. Money demand is proportional only to wealth
B. Money demand is independent of the interest rate
C. Money demand arises from the transactions motive and depends on income and the interest rate
D. Only the speculative motive matters
Answer: Option C
Solution (By JKSSB Mock Tests)
The Baumol-Tobin inventory-theoretic model derives transactions demand for money as a function of income (or expenditure), the interest rate and the fixed cost of transferring funds between money and interest-bearing assets.
Explanation:
Sunk costs are costs that have already been incurred and cannot be recovered. Rational decision-making requires ignoring sunk costs and focusing on future (incremental) costs and benefits.
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