The demand for money curve slopes downward because a rise in the nominal interest rate ________ the opportunity cost of holding money and therefore ________ the quantity of money demanded.
A)increases;increases
B)decreases;decreases
C)decreases;increases
D)increases;decreases
E)increases;does not change

Question

Quizplus · Accepted Answer

A rise in the nominal interest rate increases the opportunity cost of holding money (since money does not earn interest), so people will seek to hold less money and more interest-bearing assets (such as bonds or savings accounts). Therefore, the quantity of money demanded will decrease as the nominal interest rate increases. This inverse relationship between the nominal interest rate and the quantity of money demanded is represented by the downward slope of the demand for money curve.

The Demand for Money Curve Slopes Downward Because a Rise