If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is:
A) zero.
B) 0.02%.
C) 1%.
D) 2%.

Question

Quizplus · Accepted Answer

The opportunity cost of holding cash in a checking account is the difference between the interest rate of the checking account and the highest available interest rate, which is the Treasury bill in this case. Therefore, the opportunity cost is 2% (3% - 1%). The best choice is D.

If a Checking Account Has an Interest Rate of 1