As interest rates rise, _____.

Question

firms will generally spend their wealth

bonds and savings accounts become less attractive for investment

it becomes less expensive to hold money as cash

it becomes more expensive to hold money as cash

Answer 1

As interest rates rise, it becomes more expensive to hold money as cash.

When interest rates increase, the opportunity cost of holding cash rises because you forgo the interest income you could earn by investing that money in interest-bearing accounts or securities. Therefore, people and firms are incentivized to either invest their funds or reduce their cash holdings.