In the medium run, an increase in inflation causes:
A) no change in the opportunity cost of holding money.
B) an increase in the opportunity cost of holding money.
C) individuals to switch from holding bonds to money and increase their real money balances.
D) a decrease in the opportunity cost of holding money.
E) real interest rates to decrease.

Question

Quizplus · Accepted Answer

In the medium run, an increase in inflation increases the opportunity cost of holding money because it reduces the purchasing power of money. As a result, individuals are more likely to spend their money rather than hold onto it, which leads to an increase in aggregate demand and can further fuel inflation. This can also lead to a decrease in the demand for bonds, as people are less inclined to hold onto assets that don't keep up with inflation.

In the Medium Run, an Increase in Inflation Causes