Answer to Question #225615 in Macroeconomics for Jordan

Question

What did Tobin's add to Keynes theory of the speculative demand for money? Why was this development important

Answer 1

Tobin's Theory relates to Keynes' theory and just like it, the speculative money demand inversely varies with the interest rate. That means when the investors are eager to set up a huge proportion of their portfolio into bond and risky assets the interest rate has increased. Thus a smaller proportion into the safest asses which is money. Therefore, according to Tobin, people have a portfolio of assets that is some bonds and some cash. Idle money is safe but will never earn interest while bonds can bring big interest from big risks.