Question

Which of the following factors DO NOT determine the cost of money (interest rate)?

A. Inflation-increase in the money supply/general increase in the price of goods and services

B. Production opportunities-demand for money based on the economy

C. Risk- risk and return relationship

D. Time preference for consumption- people want to spend their money sooner

E. Historical Interest Rates-past interest rates occur in earlier years.

Answer 1

historical interest rate and past interest rate which are occurred in the earlier years will not be helpful in finding out the cost of money because these interest rate has already occoured and the opportunity cost of money would be always found at the current interest rate which would be offered by the State Government bonds or Federal Government bonds.

all the other factors like inflation and production opportunities along with risk and reward and time preference of transaction will be determining the cost of money.

Correct answer would be option (E) historical interest rates.