The Cost of Money

Production Opportunities

The investment opportunities in productive (cash-generating) assets.

Time Preferences for Consumption

The preferences of consumers for current consumption as opposed to saving for future consumption.

Risk

In a financial market context, the chance that an investment will provide a low or negative return.

Inflation

The amount by which prices increase over time.

1. Production Opportunities

2. Time preferences for Consumption

3. Risk

4. Inflation

4 Most Fundamental Factors Affecting the Cost of Money

medium of exchange

People use money as a

TRUE

TRUE OR FLASE: When money is used, its value in the future, which is affected by inflation, comes into play.

TRUE

TRUE OR FLASE: The higher the expected rate of inflation, the larger the required dollar return.

higher interest rates

Higher risk and higher inflation also lead to?

1. Short-Term rates

2. Long-Term Rates

3. Term Structure of Interest Rates

Interest Rate Levels (3)

Short-term Rates

Level of Interest Rates that are responsive to current economic conditions.

Long-term Rates

Level of Interest Rates that are primarily reflect long-run expectations for inflation.

Term Structure of Interest Rates

Level of Interest Rates that shows the relationship between long-term and short-term rates.