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© 2014 Pearson Canada Inc.$21.6 Appendix 21.1: A Mathematical Treatment of the Baumol-Tobin and Tobin Mean-
Variance Models
Baumol and Tobin developed monetary models that showed ____.
A) money balances held for transaction purposes are sensitive to the level of interest rates
B) money balances held for speculative purposes are sensitive to the level of interest rates
C) money balances held for transaction purposes are not sensitive to the level of interest rates
D) money balances held for wealth purposes are sensitive to the level of interest rates
Answer: A
Diff: 2 Type: MC Page Ref: 21.1A- 1
Skill: Recall
Objective List: Appendix: A Mathematical Treatment of the Baumol-Tobin and Tobin Mean-
Variance Models
The Baumol-Tobin analysis suggests that ____.
A) velocity is relatively constant
B) the transactions component of the demand for money is negatively related to the level of
interest rates
C) the speculative motive is nonexistent
D) velocity is unrelated to the transactions motive
Answer: B
Diff: 2 Type: MC Page Ref: 21.1A- 3
Skill: Recall
Objective List: 21.2 Define the theories of the demand for money
In the Baumol-Tobin model, as interest rates increase ____.
A) the amount of cash held for transaction purposes falls and velocity and interest rates are
positively correlated
B) the amount of cash held for transaction purposes falls and velocity and interest rates are
negatively correlated
C) the amount of cash held for transaction purposes rises and velocity and interest rates are
positively correlated
D) the amount of cash held for transaction purposes rises and velocity and interest rates are
negatively correlated
Answer: A
Diff: 2 Type: MC Page Ref: 21.1A- 3
Skill: Recall
Objective List: Appendix: A Mathematical Treatment of the Baumol-Tobin and Tobin Mean-
Variance Models