Question

What factor reflects the ‘cost of money’? The ‘cost of money’ is reflected in the _______.

Answer 1

Answer:

opportunity cost

Explanation:

Opportunity cost is a microeconomic concept used to describe how much an economic agent fails to earn in one economic activity by employing money in another economic activity. For example, if a business owner is in doubt between investing in a factory or in stocks. The opportunity cost of investing in a factory is the value the entrepreneur fails to earn in the financial market. And vice versa.  

Therefore, opportunity cost reflects the cost of employing money in one activity over other activities that could yield profits. In the decision making process, economic agents should invest the money in that activity that has the lowest opportunity cost.

Answer 2

The most important factors in the cost of money are investment opportunities, time preferences for consumption , risk and inflation.