Firms hold cash to satisfy the transaction motive. This means that cash is held:

Question

Quizplus · Accepted Answer

Firms hold cash to meet disbursements for normal operations (for example, to pay for wages or rent), and to balance the flow between cash inflows and outflows (to ensure they have enough cash to cover expenses during any short-term cash shortages). Additionally, holding cash can also help firms to make unexpected payments such as special price discounts. Thus, both options A and B are correct, making D the best choice. Option C is also partially correct but does not address the primary reasons why firms hold cash. Option E is incorrect, as firms do hold cash for various reasons, including the transaction motive.

Firms Hold Cash to Satisfy the Transaction Motive