Homework $($Ch $34)$

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The opportunity cost of holding money

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.

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

$($Percent$)$

$q,$

The supply of money is independent of the interest rate.

The quantity of money demanded decreases as the interest rate falls.

The quantity of money demanded increases as the interest rate falls.

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