Sort the following items into bins depending on their effect on the opportunity

Question

Sort the following items into bins depending on their effect on the opportunity cost of holding cash. If the item would have no effect on the opportunity cost of holding cash, please leave this unplaced. Increases opportunity cost of holding cash Decreases opportunity cost of holding cash Short term interest rates increase. Deandra starts buying all her produce from the JR receives a raise. farmers' market. They don't take credit cards. Pick-pocketing is on the rise! ATM's appear on every corner. Inflation increases.

Explanation / Answer

The opportunity cost of cash is what you give up in order to hold another dollar in cash. When conditions change, so can the opportunity cost of cash. There are four items that all increase the opportunity cost of holding cash. Increase in pick-pocketing: By holding cash, you give up the security associated with another monetary vehicle. Increase in interest rates: By holding cash, you give up the opportunity to earn interest. As the interest rate increases, you give up more and more in terms of forgone interest. The number of ATM's increases: Easier access to currency reduces the costs associated with cash-only transactions. However, easier access to currency, increases the amount of currency held, which drives up the interest rate. Increased interest rates increase the opportunity cost of holding money relative to other assets. The inflation rate increases: As inflation rises, the purchasing power of each dollar falls. Holding currency means that the value of each dollar is falling faster than it would if it were held in an interest-bearing financial vehicle. If Deandra does not hold cash, then she misses out on everything she would like to purchase at the cash-only farmers' market. Deandra's opportunity cost of holding cash decreases because she needs more cash to buy her goods at the farmer's market. Holding too little cash could mean that Deandra can't buy all the goods that she wants and can afford at the farmers' market. JR receiving a raise doesn't change the opportunity cost of holding cash.

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