As the interest rate increases, the opportunity cost of money:

Question

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?????

Answer 1

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.