The Costs of Holding, Money

These three functions of money are extremely important to people, so important that individuals are willing to incur a -cost to hold currency or low-yielding checking accounts. What is the opportunity of holding money ~ It is the sacrifice in ·interest that you must incur by’ holding money rather than a. riskier, less liquid  or investment. say.that you ·put $1000 in a savings account at the beginning of 2000 you would earn about 5 percent interest and’ would have $1050 at the end of 2000. This represents a 5 percent nominal interest rate. By cotrast, suppose that you had left your 1000 in currency rather than in the savings account. You would end up with only·$I000. for currency pays no interest.  The opportunity cost of holding money as currency in this case would be S56. Money allows easy and quick transactions. unambiguous determination of price. plus easy storage of value over time. These benefits are not free, however. If wealth were. held in interest-paying assets rather than money, it would yield a higher interest rate.

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