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, a firm should aim to minimize the total cost of holding cash, which includes the opportunity cost of not investing the cash. If the interest rate on short-term securities increases, it becomes more attractive to invest the cash instead of holding it, so the firm should decrease the average cash balance to minimize the total cost.

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