Mark who lives in a country where interest rates are very high, goes to an ATM every day to get $10 of spending money. Jim , who lives in a country with relatively low interest rates, goes to the ATM once a month to get $300 of spending money. Why does Mark use the ATM more frequently? (Assume they both have interest bearing checking accounts.

Question

Manuel Esparza

Business

26 December, 04:15

Mark who lives in a country where interest rates are very high, goes to an ATM every day to get $10 of spending money. Jim , who lives in a country with relatively low interest rates, goes to the ATM once a month to get $300 of spending money. Why does Mark use the ATM more frequently? (Assume they both have interest bearing checking accounts.

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Answers (1)

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Maddox Perry · Answer 1

The correct answer is that Mark's opportunity cost of holding cash is higher

Explanation:

Opportunity cost is nothing but the value of the next best alternative that a person has given up, when that person had the choice of selecting between any number of options. You will not find this cost to be shown in your financial statements or balance sheets but this cost is very important in telling which option is the best to use or more profitable for a person or company.

In this question the reason why Mark uses ATM more frequently is because for him the opportunity cost for him in holding more money in hand is high as compared to the Jim whose opportunity cost of holding more money in hand is less, which means he is not not going to miss out on much of the opportunity. The reason why the opportunity cost is high for Mark is because of high rate of interest in his country, if Mark holds more money in hand then the amount of money he is going to lose on interest that he would have gained by keeping the money in bank will be high which means his opportunity cost of holding money is high.