Reasons for holding cash could be for transaction balances, compensating balances for banks, and other precautionary needs.

Question

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Holding cash for transaction balances is necessary to pay for day-to-day expenses. Banks may also require businesses to maintain compensating balances to ensure they have a certain level of funds available. Precautionary needs refer to holding cash to prepare for unexpected expenses or emergencies.

Reasons for Holding Cash Could Be for Transaction Balances, Compensating