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 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 (Percent)	Opportunity Cost (Dollars per year)
8	_____ (10,000.00 / 800.00 / 0.08 / 8.00 / 125,000.00)
10	_____ (10,000.00 / 10.00 / 100,000.00 / 1,000.00 / 0.10)

What does the previous analysis suggest about for money?

a. The quantity of money demanded decreases as the interest rate rises.

b. The quantity of money demanded increases as the interest rate rises.

c. The supply of money is independent of interest rate.

Answer rating: 100% (QA)

When the interest rate is 8 the opportunity cost ... View the full answer