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

Question

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 it whenever you want (that is, hold it as money) or to use it t 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? 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 increase to $1,100 per year. What does the previous analysis suggest about the market for money?

Explanation / Answer

Answer to 1st option: 7% of $0,000 = $700 per year

Answer to 2nd option: increase

Answer to 3td option: 11% of $0,000 = $1,100 per year

Answer to 4th option: The quantity of money demanded decreases as interest rate rises.

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