Posted by Psharp on Wednesday, December 12, 2007 at 3:45pm.
I think the answer is A.
First, lets ask the question, What is the opportunity cost of money for the borrower. I think its the cost of OBTAINING money. The opportunity cost of getting a dollar today is having to pay a dollar plus interest next year. So, if interest rates rise, the opportunity cost of getting money rises.
What is the opportunity cost of money for the lender. I think its the cost of HOLDING money. If a lender holds a dollar, he gives up having a dollar plus interest next year. So, again, the opportunity cost of holding money rises as interest rates rise.
Make sense? I hope this helps.
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