Question

When the interest rate increases, the opportunity cost of holding money Group of answer choices increases, so the quantity of money demanded increases.

Answer 1

An increase in the interest rate increases the opportunity cost of holding money and leads to a reduction in the quantity of money demanded

What is opportunity cost ?

The opportunity cost of a particular activity option in microeconomic theory is the loss of value or benefit that would be incurred by engaging in that activity, as opposed to engaging in an alternative activity that offers a higher return in value or benefit.

The value of the next best alternative or option is referred to as the opportunity cost. This value may or may not be monetary. Value can also be measured using other criteria such as time or satisfaction. One formula for calculating opportunity costs could be the ratio of what you give up to what you gain.

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