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A) Suppose That Interest Rates Double, What According To The Baumol Model, Would Happen To The Firm’s Average Cash Balances?

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MuscleLanguage1 | 06:34 Wed 27th May 2020 | Business & Finance
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a) Suppose that interest rates double, what according to the Baumol model,
would happen to the firm’s average cash balances?
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Depends I guess...are they borrowing money or lending it?
jesus well done FF
Baumol 's model is a bit post O level for me
I shouldn't think it will make much difference. With the BoE rate at 0.1% at present (with threats that it will go negative), 0.2% is hardly crippling.
no you are all missing the Baumol model bit

https://www.yourarticlelibrary.com/accounting/working-capital-management/2-models-of-cash-management-with-calculations-working-capital/68120

except of course my fave maff teacher FF - Hi FF !
Hi PP.
Baumol was my favourite economist because of the maths content of his work
There is more on this here. Tab down to the Cash Management section. There's a formula PP will recognise based on Economic Order Quantity (EOQ)- PP has referred to this/Kaplan recently on here in relation to stock levels of Covid PPE I recall
https://kfknowledgebank.kaplan.co.uk/financial-management/working-capital/cash-management
ML1- read the links from PP and me and have a go. If you suggest an answer I'll then tell you whether I agree with the answer (which I have worked out based on my recollection of this)
Earn more on your lending less on your borrowing.
I think the coursework question expects an answer which says whether the average cash balance will stay the same or will increase or decrease, and by how much. I think the answer involves reciprocals of square roots
Did this help, MuscleLanguage1?
I'll tell you my answer then I can unsubscribe from this shortly. It will increase by a factor of half of square root of 2- ie multiply by 0.707 , or to put it another way reduce by 29.3%. But the model is just that

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