An increase in the interest rate would induce people to
A)buy shares of stock and buy bonds,but would have no effect on their desire to hold money.
B)get rid of all their money and buy stocks with it.
C)sell their least liquid assets and hold more money in case interest rates go up again.
D)hold a smaller fraction of their wealth in the form of money.

Question

Quizplus · Accepted Answer

When the interest rate increases, the opportunity cost of holding money increases as well. Therefore, individuals would hold a smaller fraction of their wealth in the form of money and would choose to invest in other assets, such as stocks and bonds, that offer a higher return. This shift in preference towards less money holdings and more investment in other assets is known as the liquidity effect.

An Increase in the Interest Rate Would Induce People to