In the Baumol-Tobin model, given that total costs for an individual equals + , where T0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule
What will be an ideal response?
An individual will minimize their costs. Thus, the optimal level of C is found as follows:
COSTS = +
= + = 0
=
Since money demand is the average desired holdings of cash balances, C/2:
Md = =
The last expression is the square root rule.
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An example of expansionary fiscal policy would be
A) a decrease in government spending to reduce budget deficits. B) an increase in tax collection to reduce budget deficits. C) a decrease in interest rates to help stimulate the economy. D) an increase in government spending on infrastructure to create jobs and improve the economy.