Question

The opportunity cost of holding money refers to:

A) the service fees associated with checking accounts plus the costs undertaken to prevent theft.
B) the pleasure that would have been received if the money balances had been used to buy a good or service.
C) the interest that could have been earned if the money balances had been transferred to an interest-bearing asset.
D) the service fees associated with checking accounts.

Answer 1

Answer: C) the interest that could have been earned if the money balances had been transferred to an interest-bearing asset.

Step-by-step explanation:

Opportunity Cost as you may or may not know refers to the cost you incur as a result of picking one alternative over the other. Simply put, it is the income of the next best alternative that you could be earning if you had picked it.

If money is being held by hand or rather physically then that means it is not being invested. One of the most popular methods of investing is to deposit money with an interest bearing asset that will pay you interest on the Investment. Option C in this instance is therefore correct because holding money has the opportunity cost of the interest you could have made had you invested instead in an interest bearing asset.