When Does the Opportunity Cost of Holding Money Increase

question 91

Multiple Choice

When does the opportunity cost of holding money increase?  

• A) when the interest rate rises 
• B) when the interest rate falls 
• C) when nominal GDP rises 
• D) when nominal GDP falls

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Definitions:

Liquidity Risk Premium

The extra yield or return that investors demand for holding a security that may not be easily sold or converted into cash without a significant loss in value.

Maturity Risk Premium

The additional yield demanded by investors as compensation for the increased risk of holding a bond as it approaches its maturity date.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, and, subsequently, the purchasing power of currency is falling.

Pure Rate

The interest rate exclusive of all other elements such as risk premium, inflation, or other costs often considered the real rate of interest with no adjustments.