© 2000 John Petroff
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© 2000 John Petroff |
2)- Compensation for non-use of money
The compensation for non-use of money and the liquidity preference components are very close to one another, but they are different. The compensation for non-use of money is similar to a rental concept in the case of any physical asset. The one who uses the funds, can acquire equipment, inventory or other assets which generate sales and profits. The one who provides these funds, is unable to acquire any such physical asset and must be compensated for this non-use of money. This is clearly an opportunity cost.
This component is mostly affected by investment demand for cash. During periods of fast economic expansion, demand for investment will drive up rates because of anticipated large profits from growing sales; in addition, lenders will raise interest rates because they are running out of reserves. During economic recession, lack of demand for investment will cause rates to drop irrespective of all other components.
See review questions Q-2D2.1 through Q-2D2.3.
See research assignment R-2D2.1.
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