A firm using Baumol's model will do one of the following if the interest rate on short-term securities went up.

Question

Quizplus · Accepted Answer

According to Baumol's model, the firm's optimal cash balance is inversely related to the opportunity cost of holding cash, which is influenced by the interest rate on short-term securities. If the interest rate increases, the opportunity cost of holding cash also increases, and the firm would need to reduce its average cash balance to minimize the cost of holding cash. Therefore, the firm would choose to decrease the average cash balance under such circumstances.

A Firm Using Baumol's Model Will Do One of the Following