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 noninterest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a government bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost (Percent) (Dollars per year) 6 3 What does the previous analysis suggest about the market for money? O The quantity of money demanded increases as the interest rate falls. O The quantity of money demanded decreases as the interest rate falls. The supply of money is independent of the interest rate.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a noninterest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a government bond.
 
NOTE:
the options for opportunity for dollars per year for cost at interest rate 6% are (166,667 or 6 or 600 or 0.06 or 10,000)
 
the options for opportunity for dollars per year for cost at interest rate 3% are (333,333 or 10,000 or 300 or 3 or 0.03)
 
 
What does the previous analysis suggest about the market for money?
 
The quantity of money demanded increases as the interest rate falls.
 
The quantity of money demanded decreases as the interest rate falls.
 
The supply of money is independent of the interest rate.
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 noninterest-bearing account so that
you can use it whenever you want (that is, hold it as money) or to use it to buy a government bond.
The opportunity cost of holding the inheritance as money depends on the interest rate on the bond.
For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money.
Interest Rate on Government Bond
Opportunity Cost
(Percent)
(Dollars per year)
6
3
What does the previous analysis suggest about the market for money?
O The quantity of money demanded increases as the interest rate falls.
O The quantity of money demanded decreases as the interest rate falls.
The supply of money is independent of the interest rate.
Transcribed Image Text: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 noninterest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a government bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money. Interest Rate on Government Bond Opportunity Cost (Percent) (Dollars per year) 6 3 What does the previous analysis suggest about the market for money? O The quantity of money demanded increases as the interest rate falls. O The quantity of money demanded decreases as the interest rate falls. The supply of money is independent of the interest rate.
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