Velocity Wanted: Reasons for Money Hoarding 02
Nothing good comes for free: We must sacrifice all the other opportunities for the purpose of getting a certain utility as benefit. We do conduct cost-benefit analysis to make the most beneficial choice at each and every step forward, the “marginal” step as called in economics. In general, we choose the single best at the opportunity cost of second best . Gregory Mankiw among other macroeconomists proposes that the opportunity cost of “ liquidity preference ” is the fed fund rate (e.g. Macroeconomics of any edition). In effect, he and they regard “the opportunity to make a deposit at the Fed” as the single best opportunity forgone of all. Believe it or not! We the lay people have instead indefinitely many opportunities open to us which depend upon the situation at the time of choice: the first best followed by the second...