It is costly to hold money because:

• A. money always increases in value over time due to inflation
• B. holding money guarantees higher future purchasing power
• C. holding money means forgoing potential interest earnings from alternative investments
• D. banks charge fees for simply possessing cash

Answer: (C)

Verified step by step guidance

1. Understand the concept of the opportunity cost of holding money: When you hold money as cash, you give up the chance to earn interest or returns from other investments such as bonds or savings accounts.
2. Recognize that inflation actually decreases the value of money over time, so the statement that money always increases in value due to inflation is incorrect.
3. Note that holding money does not guarantee higher future purchasing power; in fact, inflation tends to erode purchasing power.
4. Consider that banks charging fees for holding cash is not a general reason why holding money is costly; the main cost is the forgone interest.
5. Conclude that the primary cost of holding money is the opportunity cost, which is the interest or returns you miss out on by not investing that money elsewhere.