This chapter focuses on why people demand money. Individuals and firms demand money to make transactions. The inventory approach to money demand, from Baumol and Tobin, says that families can maintain their income in money that pays no interest; but they face a trade-off between the opportunity cost of forgone interest of holding the money and the fixed costs of selling assets for money. The real demand for money is shown as a function of two variables, money and price level. In the process, Larraín explains liquidity, the role of financial instruments, the quantity theory of money, and velocity of money.
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