As the nominal interest rate increases ________.
A)it becomes more costly to hold bonds instead of money
B)the quantity of money demanded rises
C)the opportunity cost of holding money rises
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

As the nominal interest rate increases, the opportunity cost of holding money (i.e. the cost of forgoing interest earnings by holding money instead of interest-bearing assets such as bonds) rises. This implies that individuals will be less willing to hold money and will instead prefer to hold bonds or other interest-bearing assets, causing the demand for money to fall. Therefore, choices A and B are incorrect. Choice D is incorrect because not all of the above implications are true.

As the Nominal Interest Rate Increases ________