Zero-Interest Currency as a Cheap Form of Government Borrowing

A business owner needs to decide how to hold $50,000 in liquid funds for one year. They have two choices: hold the amount in physical banknotes in the company's vault or deposit it into a business savings account that pays a 2% annual nominal interest rate. Ignoring factors like security risks and inflation, which statement best distinguishes the financial outcome of these two choices based on their inherent characteristics?

Government Funding Decision

Distinguishing Financial Assets by Return

Match each financial asset with the description that best characterizes its typical nominal interest rate.

If a country's central bank implements a policy that leads commercial banks to charge a 0.5% fee on deposits (effectively a -0.5% interest rate), an individual holding their savings as physical banknotes would be earning a higher nominal interest rate than an individual keeping their savings in a bank account.

Evaluating the Choice to Hold Physical Currency

Unlike financial assets such as savings accounts or government bonds that typically offer a return, the nominal interest rate earned by holding physical banknotes and coins is always ______.

An individual is evaluating four different ways to hold $10,000 for one year. Arrange the following options in order from the one that provides the lowest nominal return to the one that provides the highest nominal return. Assume no changes in the principal value other than the stated interest or fees.

Nominal vs. Real Return on Physical Currency

A company holds $1 million in physical banknotes in its vault for one full year. When analyzing the financial impact of this decision, which statement describes a direct and unavoidable consequence stemming from the fundamental properties of physical currency itself, regardless of other economic conditions or business decisions?