Suppose a typical household holds $500 when the interest rate is 2 percent. When the interest rate rises to 3 percent, the household would most likely hold

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When the interest rate rises, the opportunity cost of holding money increases because the potential return from saving or investing the money increases. As a result, households are likely to hold less money and invest or save more of their income to take advantage of the higher interest rates. Therefore, the household would most likely hold less money when the interest rate rises from 2 percent to 3 percent.

Suppose a Typical Household Holds $500 When the Interest Rate