According to the theory of liquidity preference, the opportunity cost of holding money is?

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22-08-2022
Business

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According to the theory of liquidity preference, the opportunity cost of holding money is?

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RajarshiG RajarshiG · Answer 1 · 2022-08-31T19:05:15+02:00

According to the theory of liquidity preference, the opportunity cost of holding money is the interest rate.

Liquidity Preference Theory is a model that means that an investor should demand a better rate of interest or premium on securities with long-term maturities that carry larger risk as a result of, all alternative factors being equal, investors like money or alternative extremely liquid holdings.

The opportunity cost of holding money is that the rate of interest forgone on various assets, that we are able to lump along generically and decision “bonds.” The opportunity cost of holding money is that the nominal rate of interest, not the real rate of interest.

To learn more about Liquidity Preference Theory here

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