If the opportunity cost of holding money rises, the quantity of money demanded will

• A. Rise along the money demand curve
• B. Shift to the left
• C. Shift to the right
• D. Remain unchanged

Answer: (B)

Think of money demand as how much cash people want to hold at given returns on alternative assets. The opportunity cost of holding money is the foregone return from not investing in interest-bearing assets like bonds. When that opportunity cost rises, people prefer to hold less money and invest more in other assets. That change affects the entire relationship between money demanded and the opportunity cost, so the money-demand curve shifts left. In other words, at every level of the opportunity cost, the quantity of money people want to hold is lower than before.