If the nominal interest rate increases:

Question

Quizplus · Accepted Answer

An increase in the nominal interest rate makes it more expensive to borrow money and thus increases the opportunity cost of holding money (as it could be invested to earn interest instead). Therefore, the cost of holding money increases. Additionally, there is no clear relationship between nominal interest rates and velocity of money, so option C can be ruled out. Option A is incorrect because the cost of holding money decreases when interest rates are low, not when they increase. Option D is partially correct in that the cost of holding money increases, but the second statement about velocity of money is not necessarily true.

If the Nominal Interest Rate Increases