Question

Which of the following is NOT one of the four fundamental factors which effect the cost of money?

Group of answer choices

a.Sunk Costs

b.Production Opportunities

c.Time Preferences for Consumption

d.Risk

Answer 1

The four fundamental factors which affect cost of money are:

1.Production Opportunities: It refers to the investment being made in productive assets to yield profit. If there are ample amount of production opportunities, it will lead to increase in demand of money and consequently cost of money will also increase and vice versa.

2. Time Preference for consumption: The cost of money is affected by whether consumption is made in current period or future period. Time preference of consumption signifies the preference of consumption in current period in comparison to future period. But if consumption is made in current period, consumers will be able to save less amount of money. It leads to reduction of money supply and cost of money will increase. It means if there is high preference for current consumption, there will be high cost of money and vice versa.

3. Risk: The element of risk signifies the probability of loss or chances that investment will not yield desired returns. There is positive relation between risk and cost of money. If there are high risk, then cost of money will also be high and vice versa.

4.Inflation: The fourth fundamental factor which affect cost of money is inflation. Higher inflation reduces the purchasing power and therefore investors always want higher return to compensate the reduction in purchasing power. Therefore if inflation is high then cost of money will be high and vice versa.

Therefore Option (a) is incorrect. Sunk cost does not affect cost of money.