Answer to Question #225612 in Macroeconomics for Jordan

Question

according to baumol, the transaction demand for money depends upon the rate as well as nominal income , explain why the transaction demand for money depends upon the interest rate. Why is it important

Answer 1

The demand for money is related to interest rates, income and if the people prefer to hold illiquid assets for example money. At high interest rates, people prefer to hold bonds. When interest rates decreases, holding bonds gives a lower return which leads to people to prefer holding cash.