Which of the following is true of the opportunity cost of holding cash?

• A. It only applies when inflation is present.
• B. It increases as the amount of cash held decreases.
• C. It is always zero because cash is the most liquid asset.
• D. It is the interest or return forgone by not investing the cash elsewhere.

Answer: (D)

Verified step by step guidance

1. Understand the concept of opportunity cost: it represents the value of the next best alternative foregone when making a choice.
2. Recognize that holding cash means you are not investing that money in other assets that could earn interest or returns.
3. Identify that the opportunity cost of holding cash is the interest or return you give up by not investing it elsewhere.
4. Note that this opportunity cost exists regardless of inflation, because it is about forgone returns, not just changes in purchasing power.
5. Conclude that the correct statement is that the opportunity cost of holding cash is the interest or return forgone by not investing the cash elsewhere.