Question

According to liquidity preference theory, the opportunity cost of holding money is Group of answer choices the difference between the inflation rate and the interest rate on bonds. the inflation rate. the cost of converting bonds to a medium of exchange. the interest rate on bonds. None of the options is correct.

Answer 1

The correct answer is letter "D": the interest rate on bonds.

Step-by-step explanation:

Investors tend to keep their money liquid as cash, and expect attractive returns for sacrificing their liquidity, according to the Liquidity Preference Theory. Investors will pay more for short-term debt and the liquidity that comes with it, and they will also seek higher interest rates before taking on longer-term debt.

Thus, the opportunity cost of holding money, according to the liquidity preference theory would be the returns obtained from investing in assets such as stocks or interest rates with bonds.