If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

The opportunity cost of holding money is the interest rate that could have been earned from investing in alternative assets such as CDs. If the interest rate on CDs increases, the opportunity cost of holding money also increases, as the potential return from investing in CDs is higher. Therefore, individuals will be less likely to hold onto money and will instead invest in CDs (or similar assets) to take advantage of the higher interest rate. This results in a decrease in the quantity demanded of money.

If the Interest Rate on CDs Rises from 5% to 10