1.The opportunity cost of holding assets as money Suppose you\'ve just inherited

Question

1.The opportunity cost of holding assets as money Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non -Interest -bearing checking account so that you can use a whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. Suppose the interest rate on the bond is 7% per year. What would be the opportunity cost of holding the $10,000 as money? $10,000 per year $700 per year $280,000 per year $654 per year $7 per year Now, suppose that the interest rate rose to 11% per year. This would cause the opportunity cost of holding the $10,000 as money to to per year. increase decrease What does the previous analysis suggest about the market for money' The quantity of money demanded decreases as the interest rate rises. The supply of money is Independent of the interest rate. The quantity of money demanded increases as the interest rate rises.

Explanation / Answer

The ooportuntiy cost of holding money is the interest rate received if that money is invested.

At 7% interest, the opportunity cost of holding $10000 is $700 (10000 x 0.07)

At 11% interest rate the opportuntiy cost will increase to $1100

This shows the quantity of money demanded decreases as interest rate increases.

This is because people will be less likely to hold money with greater interest on investment.

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