Which of the following is correct?
A)The asset demand for money is downward sloping because the opportunity cost of holding money declines as the interest rate rises.
B)The asset demand for money is downward sloping because the opportunity cost of holding money increases as the interest rate rises.
C)The transactions demand for money is downward sloping because the opportunity cost of holding money varies inversely with the interest rate.
D)The asset demand for money is downward sloping because bond prices and the interest rate are directly related.

Question

Quizplus · Accepted Answer

The asset demand for money refers to the demand for money as a store of value or an asset, and not as a medium of exchange in transactions. As the interest rate rises, the opportunity cost of holding money increases because holding money earns no interest while other assets such as bonds offer higher returns. Therefore, individuals will demand less money as an asset and more of other interest-bearing assets causing a downward slope in the asset demand for money.

Which of the Following Is Correct