When interest rates rise, the quantity demanded of money held for the:
A) speculative demand rises.
B) precautionary demand rises.
C) transactions demand falls.
D) speculative demand falls.

Question

Quizplus · Accepted Answer

When interest rates rise, the cost of holding money increases because individuals and businesses could be earning interest on those funds if they were invested. Therefore, the speculative demand for money, which is holding money to take advantage of future changes in interest rates or prices, falls as people are less inclined to hold onto cash that could be earning interest elsewhere.

When Interest Rates Rise, the Quantity Demanded of Money Held