In the theory of demand for money, the rate of interest can be thought of as the opportunity cost, or ‘price’, of holding:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → money balance
Money kept in hand earns no interest. The interest a person gives up is the cost of holding money. So the rate of interest is the opportunity cost, or ‘price’, of holding money balance.
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. …” “The Speculative Motive … As mentioned earlier, interest rate can be thought of as an opportunity cost or ‘price’ of holding money balance. …” |