The quantity of M1 demanded varies inversely with market interest rates because
A)higher market interest rates lead the public to demand more money to make investments with.
B)high interest rates discourage investments in fixed capital.
C)market interest rates represent the opportunity cost of holding M1.
D)high interest rates encourage banks to make more loans.

Question

Quizplus · Accepted Answer

Market interest rates represent the opportunity cost of holding M1. As interest rates increase, the opportunity cost of holding money in the form of M1 also increases. Therefore, people demand less M1 when the interest rates are high.

The Quantity of M1 Demanded Varies Inversely with Market Interest