How does an increase in the short-term interest rate affect peoples' desire to hold real money balances?
A) People will hold more money to compensate for the higher interest rate.
B) People will hold more money in anticipation of higher inflation.
C) People will hold less money since they would be sacrificing more interest by holding money.
D) People will hold less money since it is not worth as much.

Question

Quizplus · Accepted Answer

When the short-term interest rate increases, people have the opportunity to earn more interest on their money if they invest it, rather than holding it as cash. As a result, people will hold less money since they would be sacrificing more interest by holding money.

How Does an Increase in the Short-Term Interest Rate Affect