At higher nominal rates of interest, the demand for real balances is:
A) higher because savers can earn higher returns.
B) lower because the opportunity cost of holding those funds is higher.
C) invariant with respect to the nominal interest rate.
D) inversely related to the price level.

Question

Quizplus · Accepted Answer

At higher nominal rates of interest, the opportunity cost of holding money is higher as individuals can earn higher returns by investing their money elsewhere. Therefore, the demand for real balances is lower.

At Higher Nominal Rates of Interest, the Demand for Real