Suppose you\'ve Just inherited dollar 10, 000 from a relative. You\'re trying to

Question

Suppose you've Just inherited dollar 10, 000 from a relative. You're trying to Devise weather to put the dollar 10, 000 in a non-interest-bearing Peeking account so that your car use K whenever you want art (that Is, hold It as money) or to use to buy a U.S. treasury bond. Suppose the interest rate or the board is 5% per year. What would be the opportunity cost of holding me dollar 10, 000 as money' dollar 5 per year dollar 500 per year dollar 10, 000 per year dollar 200, 000 per year dollar 476 per year Now, suppose mat the interest rote rose to 12% per year. This would cause the opportunity cost of holding the dollar 10, 000 as money to to per year. What does the previous analysis suggest about the market for money? The quantity of money demanded increases as the interest rate rises. The supply of money is independent of the interest rate The quantity of money demanded decreases as the interest rate rises.

Explanation / Answer

The correct answer is $ 500 per year. ( $ 10,000 x 5%)

If the interest rate rose to 12% per year, it would cause the opportunity cost of holding $ 10,000 to increase to $ 1,200 per year. ( $ 10,000 x 12%)

The analysis suggests that: The quantity of money demanded decreases as the interest rate rises.

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