As the nominal interest rate increases ________.
A)it becomes more costly to hold money instead of bonds
B)the quantity of money demanded falls
C)the opportunity cost of holding money rises
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

When the nominal interest rate increases, it becomes more costly to hold money instead of bonds, as the relative return on bonds becomes more attractive. This leads people to hold less money and demand fewer goods and services, causing the quantity of money demanded to fall. Additionally, the opportunity cost of holding money rises because the return on interest-bearing assets is now higher, making the foregone interest income from holding money more significant. Therefore, all of the above are true when the nominal interest rate increases.

As the Nominal Interest Rate Increases ________