Baumol - Tobin Flashcards
What is the primary goal of the Baumol-Tobin model?
To determine the optimal cash balance that minimizes total transaction costs.
True or False: The Baumol-Tobin model assumes that cash inflows and outflows occur continuously.
False
Fill in the blank: The Baumol-Tobin model is used in the context of _____ management.
cash
What does the term ‘near money’ refer to?
Assets that are not cash but can be quickly converted into cash.
Multiple Choice: Which of the following is considered a monetary aggregate? A) Cash B) Savings accounts C) Both A and B
C) Both A and B
What is one key assumption of the Baumol-Tobin model?
The cost of holding cash is constant.
True or False: Financial innovation can influence the liquidity preferences of individuals.
True
What does the term ‘transaction costs’ refer to in the Baumol-Tobin model?
Costs incurred when converting securities into cash.
What is the formula used to determine the optimal cash balance in the Baumol-Tobin model?
C* = sqrt((2 * F * T) / r), where F is fixed transaction cost, T is total cash needs, and r is interest rate.
Fill in the blank: _____ refers to the ease with which an asset can be converted into cash.
Liquidity
Multiple Choice: Which of the following is NOT a component of monetary aggregates? A) M1 B) M2 C) M3 D) M4 E) M5
E) M5
What does ‘M1’ include?
Currency in circulation and demand deposits.
True or False: The Baumol-Tobin model is primarily concerned with long-term investment strategies.
False
What is one impact of financial innovation on cash management?
It can reduce transaction costs and increase the efficiency of cash management.
Fill in the blank: The Baumol-Tobin model helps firms manage their _____ effectively.
liquidity
What role do monetary aggregates play in the economy?
They provide a measure of the money supply within an economy.
Multiple Choice: Which of the following is considered part of M2? A) Savings accounts B) Time deposits C) Both A and B
C) Both A and B
What is the significance of the interest rate ‘r’ in the Baumol-Tobin model?
It represents the opportunity cost of holding cash.
True or False: The Baumol-Tobin model can be applied to personal finance as well as corporate finance.
True
What does ‘financial innovation’ typically involve?
The development of new financial products or processes.
Fill in the blank: _____ money refers to money that is easily accessible, such as cash or checking accounts.
Liquid
What is the primary limitation of the Baumol-Tobin model?
It assumes constant transaction costs and interest rates.
Multiple Choice: Which aggregate is the broadest measure of the money supply? A) M1 B) M2 C) M3
C) M3
What is the relationship between cash management and financial innovation?
Financial innovation can enhance cash management strategies by offering better tools and options.
