Under the BAT model, a decrease in the total amount of new cash needed for transactions over the planning period will cause the optimal initial balance to decline.

Question

Quizplus · Accepted Answer

Under the Baumol-Tobin (BAT) model, the optimal initial cash balance is determined by the trade-off between the transaction cost of converting securities to cash and the opportunity cost of holding cash. If the total amount of new cash needed for transactions decreases, the frequency of conversions from securities to cash will decrease, leading to a lower optimal initial balance.

Under the BAT Model, a Decrease in the Total Amount