Question

According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important? 

Answer 1

The demand for money is related to income, interest rates and whether people prefer to hold money or illiquid assets like money. At high-interest rates, people prefer to hold bonds. When interest rates fall, holding bonds gives a lower return so people prefer to hold cash.