Under specified assumptions, derive the square-root formula of the Baumol-Tobin's inventory model of transactions demand for money and briefly describe the effect of a one period increase in the price level on the demand for money. How would your answer change if real transaction costs decrease simultaneously with the one-period increase in the price level? Explain carefully and illustrate your answers with a diagram.

The monetarists have demonstrated that the early Keynesians were wrong in saying that money doesn't matter at all to economic activity. Therefore, we should accept the monetarist position that money is all that matters". Do you agree? Why? Why not?