Q. Explain about Baumol Model?
Baumol Model: - Baumol model is a mechanism of cash management which is used to determine optimum cash balance. Optimum cash balance is resolute by establishing a balance between liquidity and profitability.
Higher liquidity or else higher cash balance signifies excessive cash is kept in business which results in loss of interest which can be earned by investing this excessive cash in marketable securities. In contrast lower liquidity or a very low cash balance means no idle cash as well as interest is being earned by investing the excess cash into securities. However in this case also additional costs are incurred such as brokerage of converting securities into, accounting costs of securities, cash, cost of registration of securities etc.