lth at the end of the year. If you hold the wealth as money, you will have y in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you ▼ more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is ▼ interest rate. v consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held ▼ in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset an asset with a nominal rate of 6% will be v in one year, compared to the refore gives you purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for ulating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the interest rate.
lth at the end of the year. If you hold the wealth as money, you will have y in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you ▼ more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is ▼ interest rate. v consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held ▼ in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset an asset with a nominal rate of 6% will be v in one year, compared to the refore gives you purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for ulating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the interest rate.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter27: Money And Banking
Section: Chapter Questions
Problem 6SCQ: Imagine that you are in the position of buying loans in the secondary market (that is, buying the...
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Transcribed Image Text:14. The Opportunity Cost of Holding Assets as Money
Suppose you have been told that the opportunity cost of holding wealth as money is determined by the interest rate, but you aren't sure whether this refers to the real interest rate or the
nominal interest rate. Suppose the inflation rate is stable at 3%, and you currently have €1,000 in a non-interest-bearing bank account.
Consider the decision of whether to hold wealth as money or as an interest-earning asset that pays a nominal rate of 6%. If you hold wealth as an interest-earning asset, you will have
in
wealth at the end of the year. If you hold the wealth as money, you will have
in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you
more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is
the
interest rate.
Now consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held
as an asset with a nominal rate of 6% will be
in one year, compared to the
in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset
therefore gives you
purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for
calculating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the
interest rate.
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