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

Question

Quizplus · Accepted Answer

The opportunity cost of holding money balances is the interest that could have been earned if the money had been invested instead. Therefore, when the nominal interest rate increases, the cost of holding money balances also increases as the opportunity cost of holding money is higher.

The Cost of Holding Money Balances Increases When