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 account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a u.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond.
Answers
Answer:
Explanation:
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 to buy a U.S. Treasury bond. Suppose the interest rate on the bond is 5% per year.
a) What would be the opportunity cost of holding the $10,000 as money?
b) Suppose the interest rate fell to 2% per year. What would happen to the opportunity cost of holding the $10,000 as money?
c) What does this previous analysis suggest about the market for money?
Money Demand:
The demand for money is the demand for liquid form of money. The quantity of money demanded depends on the interest rates that someone could earn by using the money in interest-bearing assets rather than keeping it on checking accounts or in a wallet.
Answer and Explanation:
a) The opportunity cost of holding money as cash is the foregone interest if that money would be used to buy treasury securities. The interest rate