When the nominal interest rate rises, the opportunity cost of holding money
A) falls and people hold less money.
B) falls and people hold more money.
C) rises and people hold more money.
D) rises and people hold less money.

Question

Quizplus · Accepted Answer

The opportunity cost of holding money represents the foregone interest that could have been earned if the money had been invested. As the nominal interest rate rises, the opportunity cost of holding money increases because the return on holding money is now lower compared to the return on investment. Therefore, people will prefer to invest their money rather than holding it, leading to a decrease in money demand and an increase in interest rates. Hence, as the nominal interest rate rises, people hold less money.

When the Nominal Interest Rate Rises, the Opportunity Cost of Holding