If the nominal interest rate increases, you would expect:

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BlackTom AI · Accepted Answer

The question asks what happens when the nominal interest rate increases. This relates to the opportunity cost of holding money: as interest rates rise, people incur a higher foregone interest by holding cash instead of interest-bearing assets, so the quantity of money demanded falls.
Option a: 'The money supply to increase' is incorrect because the money supply is typically determined by the central bank and banking system factors, not directly by movements in the nominal interest rate in the short run. An interest rate increase does not automatically force the central bank to expand the money supply.
Option b: 'The money supply to decrease' is not the standard implication of a higher nominal rate. While the money supply can influence rates, a rise in rates does not inherently imply a deliberate contraction of the money supply; the relationship is indirect and not guaranteed.
Option c: 'The demand for money to increase' contradicts the opportunity-cost logic. Higher nominal rates raise the opportunity cost of holding money, thus reducing the demand for money, not increasing it.
Option d: 'The demand for money to decrease' aligns with the theory: as nominal rates go up, people prefer to hold less money and shift toward interest-earning assets, so money demand falls.
In summary, the core idea is that higher interest rates make holding money more costly in terms of foregone interest, leading to a decrease in the quantity of money demanded. Therefore, option d correctly describes the expected outcome.

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BU.220.610.51.FA25 M6 Quiz- Requires Respondus LockDown Browser

If the nominal interest rate increases, you would expect:

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