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lth at the end of the year. If you hold the wealth as money, you will have y in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you ▼ more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is ▼ interest rate. v consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held ▼ in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset an asset with a nominal rate of 6% will be v in one year, compared to the refore gives you purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for ulating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the interest rate.

lth at the end of the year. If you hold the wealth as money, you will have y in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you ▼ more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is ▼ interest rate. v consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held ▼ in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset an asset with a nominal rate of 6% will be v in one year, compared to the refore gives you purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for ulating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the interest rate.

Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter22: Money Growth And Inflation
Section: Chapter Questions
Problem 5CQQ
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14. The Opportunity Cost of Holding Assets as Money Suppose you have been told that the opportunity cost of holding wealth as money is determined by the interest rate, but you aren't sure whether this refers to the real interest rate or the nominal interest rate. Suppose the inflation rate is stable at 3%, and you currently have €1,000 in a non-interest-bearing bank account. Consider the decision of whether to hold wealth as money or as an interest-earning asset that pays a nominal rate of 6%. If you hold wealth as an interest-earning asset, you will have in wealth at the end of the year. If you hold the wealth as money, you will have in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is the interest rate. Now consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held as an asset with a nominal rate of 6% will be in one year, compared to the in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset therefore gives you purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for calculating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the interest rate.
Transcribed Image Text:14. The Opportunity Cost of Holding Assets as Money Suppose you have been told that the opportunity cost of holding wealth as money is determined by the interest rate, but you aren't sure whether this refers to the real interest rate or the nominal interest rate. Suppose the inflation rate is stable at 3%, and you currently have €1,000 in a non-interest-bearing bank account. Consider the decision of whether to hold wealth as money or as an interest-earning asset that pays a nominal rate of 6%. If you hold wealth as an interest-earning asset, you will have in wealth at the end of the year. If you hold the wealth as money, you will have in wealth at the end of the year. Holding wealth as an interest-earning asset therefore gives you more purchasing power than you would have if you held the wealth as money. This illustrates that the relevant interest rate for calculating opportunity cost of holding wealth as money is the interest rate. Now consider the decision of whether to spend your wealth today or hold it as an interest-earning asset to spend in a year. Again, assuming inflation is stable at 3%, the purchasing power of €1,000 held as an asset with a nominal rate of 6% will be in one year, compared to the in purchasing power you have if you spend it today. Holding wealth as an interest-earning asset therefore gives you purchasing power if you spend it in a year compared to the purchasing power you have if you spend it today. This illustrates that the relevant interest rate for calculating opportunity cost of spending money today as opposed to holding wealth as an interest-earning asset for future spending is the interest rate.
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