The opportunity cost of holding money increases when:
A)the interest rate rises.
B)the interest rate falls.
C)the price level falls.
D)nominal GDP rises.
E)nominal GDP falls.

Question

Quizplus · Accepted Answer

When the interest rate rises, the opportunity cost of holding money increases, as individuals and firms can earn a higher return by investing their money in interest-bearing assets. Therefore, they may choose to hold less money and invest more in interest-bearing assets, which decreases the demand for money and increases the interest rate further. Conversely, when the interest rate falls, the opportunity cost of holding money decreases and people may choose to hold more money, which increases the demand for money and puts downward pressure on the interest rate.

The Opportunity Cost of Holding Money Increases When