Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*.
A) If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
B) If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
C) If the average cash balance increases by 20% the total transactions costs will increase by 20%.
D) The optimal transfer amount is the same for all companies.
E) If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%.

Question

Quizplus · Accepted Answer

According to the Baumol model, the holding costs are directly proportional to the average cash balance. Therefore, if the average cash balance increases by 20%, the total holding costs will also increase by 20%. The other options are incorrect because the optimal transfer amount (C*) is not affected by increases in the total cash needed, fixed costs of selling securities, or transactions costs. Also, the optimal transfer amount can vary between companies based on their unique cash flow needs.

Which of the Following Is True of the Baumol Model