Question: What Is The Opportunity Cost Of Holding Money Quizlet?

What is the opportunity cost of holding money?

The opportunity cost is the interest rate forgone on alternative assets, which we can lump together generically and call “bonds.” The opportunity cost of holding money is the nominal interest rate, not the real interest rate.

nominal interest rate = real interest rate + expected inflation rate..

When the interest rate increases the opportunity cost of holding money?

When the interest rate increases, the opportunity cost of holding money decreases, so the quantity of money demanded decreases. You just studied 25 terms!

How do you calculate opportunity cost of holding money?

To calculate the opportunity cost of holding money, you simply subtract 100 (your initial money) from the amount you could have earned by saving it. For example, if you decided to carry money instead of investing it for two years at 5% interest, then it in effect cost you $10.25 to carry that money.

What is opportunity cost give example?

What are some other examples of opportunity cost? A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else.

What is the short term interest rate the opportunity cost of holding money?

The higher the short-term interest rate, the higher the opportunity cost of holding money; the lower the short-term interest rate, the lower the opportunity cost of holding money. Short-term rates rather than long-term rates affect money demand.

What are opportunity costs quizlet?

Explain the concept of opportunity cost. Opportunity Cost is when in making a decision the value of the best alternative is lost. e.g. choosing electricity over gas, the opportunity cost is what you’ve lost from not picking gas. Firms take decision about what economic activity they want to be involved in.

How is opportunity cost calculated?

Opportunity cost is the value of the next best alternative or option. This value may or may not be measured in money. Value can also be measured by other means like time or satisfaction. One formula to calculate opportunity costs could be the ratio of what you are sacrificing to what you are gaining.

Why is opportunity cost important in decision making?

In business, opportunity costs play a major role in decision-making. … If you decide to purchase a new piece of equipment, your opportunity cost is the money spent elsewhere. Companies must take both explicit and implicit costs into account when making rational business decisions.

What is opportunity cost of a decision?

The opportunity cost (also called an implicit cost) of a decision is the value of what you will lose or miss out on when choosing one possibility over another.