lectur4-page6 - Your money will purchase less one year from...

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What if you take your hard earned money and stuff it in your mattress at home, does it cost you anything to do that? If the inflation rate was zero, what would the cost of stuffing your money in a mattress be? Well, if you put your money in a bank, what would a bank pay you for depositing your money with the bank? Interest. Therefore, stuffing your money in a mattress costs you the interest you could have earned had you put your money in the bank. What if the inflation rate is 10 percent per year, what would it cost you to stuff your money in a mattress? Well, you are going to lose purchasing power.
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Unformatted text preview: Your money will purchase less one year from now than it would today. Prices of commodities will increase due to inflation. What cost $100 today, will cost $110 a year from now due to 10 percent inflation. Therefore, it will take more of your mattress money to purchase items one year from now than it would if you purchased those items today. If you deposit your money in the bank, the interest you receive will generally compensate you for inflation as well. The cost of holding mattress money is known as the opportunity cost of holding money. 6...
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This note was uploaded on 12/29/2011 for the course ECO 210 taught by Professor Malls during the Fall '10 term at SUNY Stony Brook.

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