Asked by Amber Abugharbieh on May 01, 2024
Verified
Which one of the following statements is correct concerning a motive for maintaining liquidity?
A) Firms should maintain compensating balances just in case they encounter an emergency situation.
B) Firms need to hold cash as a buffer between inflowing and outflowing transactions.
C) International firms have a transactional motive to hold cash in case favorable exchange rates become available.
D) Firms need to hold cash for precautionary motives especially since money market accounts are not very liquid.
E) The increasing use of electronic funds transfers is increasing the transactional motive to hold cash.
Compensating Balances
A minimum bank account balance a borrower is required to maintain as part of a loan agreement, offering the bank some security.
Transactional Motive
The transactional motive is the need to hold cash for the purpose of conducting day-to-day business operations, such as paying wages and suppliers.
- Understand the diverse reasons for retaining cash, including transactional, precautionary, and speculative purposes.
Verified Answer
MB
monzerrat berberMay 04, 2024
Final Answer :
B
Explanation :
Firms need to hold cash as a buffer between inflowing and outflowing transactions to ensure they can meet their short-term obligations without incurring additional costs or facing liquidity issues. This is known as the transaction motive for holding cash.
Learning Objectives
- Understand the diverse reasons for retaining cash, including transactional, precautionary, and speculative purposes.