Which of the following will increase the opportunity cost of holding cash or reduce it? Explain.

a. In order to attract new customers, the new internet payment firm, PayBuddy, announces it will pay0.5% interest on cash balances in a PayBuddy account.

b. To attract more deposits, banks raise the interest paid on six-month CDs.

c. In an effort to increase holiday sales, stores offer one-year zero-interest deals on purchases made with store credit cards.

Money usually provides zero rate of returns. Thus, if a person gets any benefit by not holding cash, his opportunity cost will be increased. In this situation, we see that a certain app called PayBuddy allows a 0.5% interest if they hold their money in the account of this app, since holding cash has no benefit, but holding cash in the PayBudy account is yielding a 0.5% interest to the customer.

Thus, if given the opportunity to earn 0.5% by not holding cash, if a person still chooses to hold cash, his opportunity cost will be very high.

The opportunity cost of money also depends upon the convenience of the people since people need some cash to make direct payments for their purchases. If people get their cash in CD, their money will get blocked for six months. This will create problems since the purchases that need cash will be hindered.Thus, the opportunity cost of holding cash, in this case, will increase.

If people hold a part of their cash, which they use to make payments for holidays packages, they will benefit from the zero-interest policy of the company. But if they do not do so, they will not be able to avail this benefit. Holding cash in-store credit cards will not block their money since it will take only a part of the cash they might have allotted to their holidays. Thus, it will not hinder other purchases.

Therefore, if people don’t hold balanced in-store credit cards and prefer to hold cash, then people will have to pay some interest. Thus, the opportunity cost of holding cash will be increased.