The nominal interest rate is 12 per cent and the inflation rate is 4 per cent. The opportunity cost of holding a dollar for a year is
A) 16 cents.
B) 12 cents.
C) 48 cents.
D) 8 cents.
E) 88 cents.

Question

Quizplus · Accepted Answer

The opportunity cost of holding a dollar for a year in this context is the nominal interest rate, which is 12 percent or 12 cents on a dollar. This is because the nominal interest rate reflects the total return, including the inflation rate, but the opportunity cost here is specifically about the interest foregone by not investing.

The Nominal Interest Rate Is 12 Per Cent and the Inflation