As market interest rates rise, people want to hold smaller cash balances, which means that the existing stock of money circulates faster and velocity rises.

Question

Quizplus · Accepted Answer

As market interest rates rise, the opportunity cost of holding cash increases. Therefore, people tend to hold smaller cash balances and use their money more quickly. This results in a higher velocity of money, which is the number of times a unit of currency is used to purchase goods and services within a given time period.

As Market Interest Rates Rise, People Want to Hold Smaller