If the interest rate is low, people will want to hold a lot of money balances because the
A) opportunity cost of holding money is low.
B) price of bonds is expected to go up.
C) opportunity cost of holding money is high.
D) Both answers B and C are correct.

Question

Quizplus · Accepted Answer

When the interest rate is low, the opportunity cost of holding money is also low, meaning that people do not have to sacrifice a high return on investment by holding money instead of investing in higher-yielding assets such as bonds or stocks. This leads people to hold onto more money balances. Choice B is incorrect as the price of bonds is expected to go up when interest rates decrease, making them more attractive to investors than holding onto money balances. Choice C is also incorrect as the opportunity cost of holding money is low when interest rates are low.

If the Interest Rate Is Low, People Will Want to Hold