In the Baumol-Tobin model, the optimal number of trips to the bank is determined by minimizing the total costs of holding money that are the:
A)forgone interest.
B)costs of trips to the bank.
C)forgone interest plus the costs of trips to the bank.
D)costs of trips to the bank minus the forgone interest.

Question

Quizplus · Accepted Answer

The Baumol-Tobin model assumes that individuals hold money for transactions purposes and the cost of holding money is composed of forgone interest (the opportunity cost of not earning interest on money held) and the costs of trips to the bank (the direct costs of obtaining money). The optimal number of trips to the bank is determined by finding the point where the marginal cost of an additional trip (the forgone interest of holding less money) equals the marginal benefit of the additional money obtained (the savings in transaction costs). Therefore, the optimal number of trips minimizes the total costs of holding money, which are the forgone interest plus the costs of trips to the bank.

In the Baumol-Tobin Model, the Optimal Number of Trips to the Bank