The Inventory Approach to

Transactions Demand for Money.

PRESENTER: TINOTENDA DUBE (R136847A)

Introduction
Transactions Demand for Money
Money is the medium of exchange
People hold money to make purchases
People demand money to make transactions
An abstraction from precautionary and speculative
motives

Inventory Model of the Demand for

Money
By William J. Baumol, 1952
A Stock of cash is the holders inventory of the medium
of exchange
A firm holds inventory so customers can buy.
In the same way, an individual holds an inventory of
money, to use for purchases.

Baumols model
Assumptions/ Suppositions
Rational Behavior
Cost Based Approach
Transactions perfectly foreseen and occur in a uniform
manner
Suppose an individual pays out T dollars in steady
stream
Existence of assets similar to money
Uniformity of the market interest rate
Common rates for both deposits and loans

Static economy

The model analyses three scenarios for an

individual;
Finances consumption exclusively from his earlier
accumulated savings;
Finances consumption exclusively from external
sources;
Finances consumption from its own resources.