When the opportunity cost of holding money increases, then
A) people want to hold more money.
B) the real interest rate falls.
C) the nominal interest rate falls.
D) people want to hold less money.
E) the quantity of money supplied increases.

Question

Quizplus · Accepted Answer

When the opportunity cost of holding money increases (e.g. the nominal interest rate increases), people will want to hold less money and instead invest it in other assets that offer a higher return. Therefore, the demand for money decreases, causing the nominal interest rate to increase to reach equilibrium in the money market. As a result, people will choose to hold less money and more of other assets, leading to a decrease in the quantity of money demanded.

When the Opportunity Cost of Holding Money Increases, Then