Given below are two statements:
Assertion (A): Holding a certain cash balance has an opportunity cost.
Reason (R): If the money were put in a fixed deposit in a bank instead of being held as cash, it would earn interest.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): Holding a certain cash balance has an opportunity cost. — True. Cash in hand earns nothing, so something is given up by holding it.
Reason (R): If the money were put in a fixed deposit in a bank instead of being held as cash, it would earn interest. — True. A fixed deposit pays interest.
Why R explains A?
The opportunity cost of holding cash is what is given up for it. R names that cost: the interest foregone on a fixed deposit.
NCERT (2026-27): “Box 3.1: Demand and Supply for Money : A Detailed Discussion Money is the most liquid of all assets in the sense that it is universally acceptable and hence can be exchanged for other commodities very easily. On the other hand, it has an opportunity cost. If, instead of holding on to a certain cash balance, you put the money in a fixed deposits in some bank you can earn interest on that money. While deciding on how much money to hold at a certain point of time one has to consider the trade off between the advantage of liquidity and the disadvantage of the foregone interest. Demand for money balance is thus often referred to as liquidity preference.” |