An increase in the nominal interest rate increases the quantity of credit card services because

Question

Quizplus · Accepted Answer

When nominal interest rates increase, the cost of borrowing money increases as well. This makes the opportunity cost of holding money higher, incentivizing people to use credit cards instead. As a result, the quantity of credit card transactions increases. This is known as the substitution effect because people are substituting credit card transactions for cash transactions due to the higher cost of holding cash. The other answer choices do not accurately explain why an increase in nominal interest rates would increase the quantity of credit card services.

An Increase in the Nominal Interest Rate Increases the Quantity