Suppose you can earn 5 per cent on your savings account if you deposit $500 in it. The inflation rate is 3 per cent. The opportunity cost of holding the $500 as money is
A) $100.
B) $25.
C) $80.
D) $30.
E) $525.

Question

Quizplus · Accepted Answer

The opportunity cost of holding the $500 as money instead of depositing it in a savings account is the foregone interest earnings. At a 5% interest rate, you would earn $25 ($500 * 0.05) by depositing the money. The inflation rate affects the real value of money but does not change this calculation of opportunity cost directly.

Suppose You Can Earn 5 Per Cent on Your Savings