The implicit cost of checking accounts is equal to the difference between the yield on safe short-term
Question:
The implicit cost of checking accounts is equal to the difference between the yield on safe short-term assets (such as Treasury bills) and the interest rate on checking accounts. What are the impacts of the following on the opportunity cost of holding money in checking deposits?
a. Before 1980 (when checking deposits had a zero interest rate under law) , market interest rates increased from 8 to 9 percent.
b. In 2007 (when interest rates on money were one quarter of market interest rates), interest rates declined from 4 to 2 percent.
c. How would you expect the demand for checking deposits to respond to the change in market interest rates under a and b if the elasticity of demand for money with respect to the implicit cost of money is -1?
Opportunity CostOpportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
Step by Step Answer:
a The opportunity cost climbs b 1 No effect 2 The op...View the full answer
