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

[MuscleLanguage1]

a) Suppose that interest rates double, what according to the Baumol model,
would happen to the firm’s average cash balances?

[woofgang]

Depends I guess...are they borrowing money or lending it?

[fiction-factory]

see fig 28.1 and the text
http://www.cengage.com/resource_uploads/downloads/0324422695_96964.pdf

[Peter Pedant]

jesus well done FF
Baumol 's model is a bit post O level for me

[New Judge]

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.

[Peter Pedant]

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 !

[fiction-factory]

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

[fiction-factory]

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)

[CrapAtCryptics]

Earn more on your lending less on your borrowing.

[fiction-factory]

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

[fiction-factory]

Did this help, MuscleLanguage1?

[fiction-factory]

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