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Question
Assume that the nominal interest rate in an economy is 3 percent and the cost of going to the ATM is $1.50. You spend $5 each day, and there is also a 12 percent probability of having your cash lost or stolen.a. What is your total cost of holding cash as a function of the number of days between trips to the ATM?
b. How often will you go to the ATM to minimize your costs?
Answer
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