In microeconomics, what is the opportunity cost of holding currency (cash) rather than investing those funds?

• A. The foregone interest (or other return) that could have been earned by holding an interest-bearing asset instead of cash
• B. The costs of printing and minting money borne by the government
• C. The face value of the currency that is held
• D. The increase in the nominal value of the cash over time due to compound interest

Answer: (A)

Verified step by step guidance

1. Understand the concept of opportunity cost: it is the value of the next best alternative foregone when making a choice.
2. Identify the alternatives to holding currency (cash): typically, investing funds in interest-bearing assets such as bonds, savings accounts, or other financial instruments.
3. Recognize that holding cash means you do not earn any interest or returns that you could have earned by investing those funds.
4. Formulate the opportunity cost as the foregone interest or return from the best alternative investment, which can be expressed as: \(\text{Opportunity Cost} = \text{Interest Rate} \times \text{Amount of Cash Held}\).
5. Conclude that the opportunity cost of holding cash is the interest or return you give up by not investing, rather than costs like printing money or changes in nominal value.