If banks start paying higher interest rates on checking accounts, we would expect, assuming everything else held equal,
A)the demand for money to become more sensitive to changes in the interest rate.
B)the demand for money to become horizontal.
C)the relationship between interest rates and the demand for money to be unaffected.
D)the demand for money to become less sensitive to changes in the interest rate.
E)a decrease in the supply of money.

Question

Quizplus · Accepted Answer

When banks start paying higher interest rates on checking accounts, people are more likely to hold onto their money in these accounts to earn the higher interest, making them less sensitive to further changes in the interest rate. This is because the opportunity cost of holding money (instead of investing it elsewhere) decreases as the interest earned on checking accounts increases.

If Banks Start Paying Higher Interest Rates on Checking Accounts