Econ

posted by .

As the interest rate increases, the opportunity cost of money:
A. Increases for both lender and borrower.
B. Increases for the borrower but not the lender.
C. Decreases for both lender and borrower.
D. Decreases for the borrower but not the lender.


My answer - D (Because, As the interest rate increases, the opportunity cost of holding money increases, and people choose to hold less money)

Am I right?????

  • Econ -

    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.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Econ

    Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected. Does the lender gain or lose from this unexpectedly high inflation?
  2. economics

    After an unexpected increase in the price of oil, the long run adjustment_____ the price level and_____the unemployment rate as they return to original levels. a- decreases, increases b- increases, increases c- increases, decreases …
  3. economic

    supposes that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.
  4. economic

    supposes that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expectedInflation during the 1970s was much higher than most people had expected when …
  5. economic

    supposes that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected. Using a method similar to the GDP deflator, compute the percentage change …
  6. ENGLISH

    In which of these sentences are quotation marks used incorrectly?
  7. math

    . If the maximum loan-to-value ratio that a lender will accept on a $100,000 loan is 90 percent, then the borrower must make ________
  8. Real Estate

    If a borrower can afford to make monthly principal and interest payments of $1,000 and the lender will make a 30-year loan at 8-1/2%, how large a loan (rounded to the nearest $100) can this buyer afford?
  9. math 106

    A lender offers a choice between two loans. For loan A the lender charges 12% a year compounded 12 times a year. For loan B the lender charges 12.5% a year and compounds it once a year. Is loan A or loan B a cheaper loan for the borrower. …
  10. Math

    A lender offers a choice between two loans. For loan A the lender charges 12% a year compounded 12 times a year. For loan B the lender charges 12.5% a year and compounds it once a year. Is loan A or loan B a cheaper loan for the borrower. …

More Similar Questions