When the nominal interest rate rises, the quantity of money demanded decreases because
A) people will buy fewer goods and hence hold less money.
B) the price level also rises and people decrease their demand for money.
C) people shift funds from interest-bearing assets into money.
D) people shift funds from money holdings to interest-bearing assets.

Question

Quizplus · Accepted Answer

When the nominal interest rate rises, holding money becomes more expensive relative to holding interest-bearing assets. Therefore, individuals are incentivized to shift their funds from non-interest-bearing money holdings to assets that earn interest, reducing the quantity of money they demand.

When the Nominal Interest Rate Rises, the Quantity of Money