Firms hold cash, in part, to satisfy compensating balances. Compensating balances are:
A) cash balances held at the firm in excess of its transactions needs.
B) cash balances held at the firm that are below that of its transactions needs.
C) cash balances held at the firm in excess of its cash inflows.
D) cash balances held at commercial banks to pay implicitly for bank services.

Question

Quizplus · Accepted Answer

Compensating balances are cash balances held at commercial banks by firms to compensate or pay for banking services implicitly. This practice is common in business banking relationships.

Firms Hold Cash, in Part, to Satisfy Compensating Balances