Question

True or false

Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things being equal, as the bond interest rate declines to 3 percent, you want to hold more money because the opportunity cost of holding money has decreased.

Answer 1

True, as the bond interest rate declines, the opportunity cost of holding money decreases.

Step-by-step explanation:

The question is asking if you would want to hold more money as the bond interest rate declines. When the interest rate on bonds decreases, the opportunity cost of holding money decreases as well. Opportunity cost refers to the value of the next best alternative that is forgone when a choice is made. In this case, if the bond interest rate declines, the potential return from holding money also decreases, making it less attractive compared to investing in bonds. Therefore, the answer to the question is true, you would want to hold more money as the bond interest rate declines.