If a checking account has an interest rate of 196 and a gove

If a checking account has an interest rate of 196 and a government Treasury bill has an interest rate of 3%, the opportunity cost of holding cash is: a) zero. 0 b) 0.02%. c) 296. O d) 1%.

Solution

You can invest in Treasury bond and earn 3 percent. Otherwise you can just deposit the money in your checking account and earn 1 percent. Hence the interest that is lost by not making any investment is the diffrence between the two opportunities. This makes the opportunity cost being 2 percent.

Correct option is 2%. (option c)