2. Which of the following will increase the opportunity cost of holding cash? Reduce it? Have no effect? Explain.
Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50.
A 1% processing fee on debit/credit card transactions for purchases less than $50 reduces the opportunity cost of holding cash because consumers will save money by paying with cash.
To attract more deposits, banks raise the interest paid on six-month CDs.
An increase in the interest paid on six-month CDs raises the opportunity cost of holding cash because holding cash requires forgoing the higher interest paid.
It’s the holiday shopping season and retailers have temporarily slashed prices to unexpectedly low levels.
This reduces the opportunity cost of holding cash because it can now be used to fund purchases at very low prices, compensating its owner for any interest forgone by holding cash.
The cost of food rises significantly.
Because many purchases of food are made in cash, a significant increase in the cost of food reduces the opportunity cost of holding cash.