As the nominal interest rate increases, the opportunity cost of holding money ________ and the quantity of money demanded ________.
A) increases; increases
B) decreases; decreases
C) increases; decreases
D) increases; does not change because people need money
E) decreases; increases

Question

Quizplus · Accepted Answer

When the nominal interest rate increases, the opportunity cost of holding money (instead of investing it) increases, leading people to hold less cash, thus decreasing the quantity of money demanded.

As the Nominal Interest Rate Increases, the Opportunity Cost of Holding