Question

When the interest rate increases, the opportunity cost of holding money Select one: a. decreases, so the quantity of money demanded increases. b. decreases, so the quantity of money demanded decreases. c. increases, so the quantity of money demanded decreases. d. increases, so the quantity of money demanded increases.

Answer 1

Answer:

C.

Explanation:

A higher interest rate means greater loss in money value being held by an individual. This is because the money would yield higher earnings by being in a savings account. Consequently, higher interest rate means less demand for money.

Answer 2

Answer: c. increases, so the quantity of money demanded decreases.

Explanation: The quantity of money demanded increases and decreases with fluctuations in interest rate which can be seen as the price of money/the cost of borrowing money. An increase in the interest rate increases the opportunity cost of holding money and leads to a reduction in the quantity of money demanded this is because quantity of money demanded varies inversely with the interest rate. The Central Bank of a country adjusts interest rates to keep inflation, the demand for money, and the health of the economy in a certain range.