As interest rates rise, the opportunity cost of holding money ________ and the quantity of money demanded ________.
A)rises; rises
B)rises; falls
C)falls; rises
D)falls; falls

Question

Quizplus · Accepted Answer

When interest rates rise, the opportunity cost of holding money increases because the return on holding money (zero) becomes less attractive compared to the return on other assets, such as bonds or savings accounts. As a result, people tend to hold less money and invest more in interest-bearing assets, leading to a decrease in the quantity of money demanded. Therefore, as interest rates rise, the quantity of money demanded falls.

As Interest Rates Rise, the Opportunity Cost of Holding Money