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

Question

Quizplus · Accepted Answer

The opportunity cost of holding a dollar for a year is the difference between the nominal interest rate and the inflation rate. In this case, the nominal interest rate is 12 percent and the inflation rate is 4 percent, so the opportunity cost of holding a dollar for a year is 12 percent - 4 percent = 8 percent. This means that if you hold a dollar for a year, you could have earned 8 percent interest on that dollar instead.

The Nominal Interest Rate Is 12 Percent and the Inflation