When the interest rate increases,the opportunity cost of holding money
A)increases,so the quantity of money demanded increases.
B)increases,so the quantity of money demanded decreases.
C)decreases,so the quantity of money demanded increases.
D)decreases,so the quantity of money demanded decreases.

Question

Quizplus · Accepted Answer

When interest rates increase, the return on holding money (in the form of interest earned on savings accounts, bonds, etc.) also increases. This means that the opportunity cost of holding money increases, as individuals will have to forgo earning that interest if they choose to hold onto their money instead. As a result, people tend to demand less money when interest rates increase, leading to a decrease in the quantity of money demanded.

When the Interest Rate Increases,the Opportunity Cost of Holding Money