Compensating Balances Are Often Included as a Requirement for a Line

question 92

Essay

Compensating balances are often included as a requirement for a line of credit.These balances provide income to banks but add to the cost of financing for the borrower.Why,then,would borrowers agree to such an arrangement?

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Definitions:

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Output

The total amount of goods or services produced by a company, industry, or economy within a specific period.

Labor

The human effort, including physical and mental efforts, used in the production of goods and services.

Average Total Cost Curve

A graphical representation showing a firm's total costs divided by output at various levels of production.