The opportunity cost of holding money balances increases when:
A) the inflation rate decreases.
B) the interest rate increases.
C) the interest rate decreases.
D) GDP is far from full employment.

Question

Quizplus · Accepted Answer

When the interest rate increases, the opportunity cost of holding money balances increases because individuals and firms are able to earn a higher return by investing their money rather than holding it in cash. Therefore, they are more likely to decrease their money balances and invest in other assets that offer a higher return.

The Opportunity Cost of Holding Money Balances Increases When