Question

According to liquidity preference theory, the opportunity cost of holding money is a. the difference between the inflation rate and the interest rate on bonds. b. the cost of converting bonds to a medium of exchange. c. the inflation rate. d. the interest rate on bonds.

Answer 1

The opportunity cost of retaining money, as per liquidity preference theory, is Option D.

What Is the Definition of Liquidity Preference Theory?

Liquidity Preference Theory is a model that proposes that an investor should seek a higher interest rate or premium on assets with extended maturities that involve higher risk because, all else being constant, investors seek cash or other extremely liquid assets.

According to Liquidity Preference Theory, investors seek progressively bigger premiums on medium and long-term securities against short-term securities.

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