The opportunity cost in determining the relationship between velocity and interest rate.

Question

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Answer 1

Question

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Students have asked these similar questions

Use the concept of opportunity cost to explain why velocity is higher at higher interest rates?

Provide the equation for the velocity of money in terms of Price level (P), output (Y), and the amount of money in the economy (M) a) Explain what will happen to velocity if P increases and why. b) Explain what will happen to velocity if Y increases and why. c) Explain what will happen to velocity if M increases and why.

Critically analyze what facts determine the impact of an interest rate change? How effective is monetary policy?

Answer 2

Question

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Answer 3

Question

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Answer 4

Question

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

Answer 6

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

Answer 7

Chapter 31, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Answer 8

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.