The Baumol-Tobin Model of Money Demand

To calculate your optimal cash-management scheme, we need some information about your current behavior. Since we want to know your average money holdings, we need to know how often you go to the bank, and how much you take out each time.

For the results, we will assume that you run down your cash balances in a straight line fashion, and that you completely run out of cash before you go to the bank.

Days between bank visits input box type a text
Amount taken out each visit input box type a text
Average money holdingsinput box type a text
Spending per dayinput box type a text

Now let's figure out how much cash you should be taking out according to the Baumol- Tobin model. First, we need to figure out your cost of going to the bank.

How many minutes does it take you to get money (including travelling to and from the bank, standing in line, etc.)?input box type a text
What is the value of time to you in dollars per hour, or in other words, what is your opportunity cost of time? For example, enter your after-tax wage, or the amount that you would pay to save an hour of time.input box type a text
Given what you have said, the cost of one trip to the bank is:input box type a text

Finally, we need some information to calculate your opportunity cost of holding cash. We need to know the interest rate you receive on your bank account.

Interest rate on bank account in percent per yearinput box type a text

The next screen will:

1) Show you how much your current cash-management scheme costs you per year.

2) Allow you to find your optimal cash-management scheme. Simply enter alternative values of days between visits until total cost per year is minimized.

When you have found the optimal number of days between visits, you can compare your answers to the computer's.

	Your Baseline	Alternative
Spending Per Day
Days Between Visits
Withdrawal Per Visit
Avg. Cash Holdings
Interest Rate
Foregone Int. Per Year
Bank Visits Per Year
Cost of Visits Per Year
Total Cost Per Year

What did you calculate as the optimal number of days between visits to the bank?input box type a text

Days Bet. Bank Visits		32.29
Withdrawal Per Visit ($)		323
Avg Cash Holdings ($)		161.50
Foregone Interest/Year ($)		11.31
Bank Visits Per Year		11.30
Cost of Visit ($)		11.30
Total Cost Per Year ($)		22.61

Baumol-Tobin Model of Money Demand

Cost Per Hour of Time ($)slider

Minutes Per Bank Visitslider

Spending Per Day ($)slider

Interest Rate (%)slider