An increase in the nominal interest rate would
A) encourage people to hold smaller money balances.
B) encourage people to hold larger money balances.
C) force the Fed to reduce the money supply.
D) cause the real interest rate to decline.

Question

Quizplus · Accepted Answer

An increase in the nominal interest rate would make holding money less appealing since people would earn more by putting their money in savings accounts or other interest-bearing assets. Therefore, people would hold smaller money balances.

An Increase in the Nominal Interest Rate Would