When the rate of interest increases,
A)the opportunity cost of money increases, and the quantity of money demanded increases.
B)the opportunity cost of money decreases, and the quantity of money demanded declines.
C)the demand for money is unaffected.
D)the opportunity cost of money decreases, and the quantity of money demanded increases.
E)the opportunity cost of money increases, and the quantity of money demanded declines.

Question

Quizplus · Accepted Answer

When the rate of interest increases, the opportunity cost of holding onto money increases because people can earn higher returns by saving or investing their money instead of holding onto it. As a result, the quantity of money demanded declines as people are less willing to hold onto money and more inclined to save or invest. Therefore, option E is the correct choice.

When the Rate of Interest Increases