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) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change

Question

Quizplus · Accepted Answer

When the nominal interest rate increases, the opportunity cost of holding money also increases because holding money has an opportunity cost in terms of interest foregone. As a result, people tend to hold less money and increase their demand for other assets, leading to a decrease in the quantity of money demanded. Thus, the demand for money curve slopes downward.

The Demand for Money Curve Slopes Downward Because a Rise