Suppose you hold $5,000 in cash when the interest rate on bonds is 4 percent. Other things being equal, as the bond interest rate declines to 3 percent, you want to hold more money because the opportunity cost of holding money has decreased.

Question

Quizplus · Accepted Answer

When the interest rate on bonds decreases, the opportunity cost of holding money (instead of investing in bonds) decreases, making it more attractive to hold onto cash.

Suppose You Hold $5,000 in Cash When the Interest Rate