When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?
A) The opportunity cost of holding money increases, so the quantity of money demanded increases.
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases.
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases.
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Question

Quizplus · Accepted Answer

When the interest rate increases, the opportunity cost of holding money increases because people can earn more interest by saving their money instead of holding it. As a result, the quantity of money demanded decreases because people are less willing to hold onto money when the opportunity cost is higher.

When the Interest Rate Increases, How Do the Opportunity Cost