When the interest rate falls:
A) the opportunity cost of holding money rises.
B) people shift out of holding interest-yielding assets and hold more of their wealth in the form of money.
C) the quantity of money people will hold decreases.
D) investment spending decreases.

Question

Quizplus · Accepted Answer

When the interest rate falls, the return on interest-yielding assets decreases, making them less attractive to hold. Therefore, people tend to shift their wealth from these assets to holding more money, which is not interest-yielding. This is because the opportunity cost of holding money decreases, as the return on interest-yielding assets falls.

When the Interest Rate Falls