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22 August, 22:15

The amount of money that the public wants to hold in the form of cash will

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  1. 22 August, 22:34
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    decrease, if interest rate increases

    increase, if interest rate decreases

    Explanation:

    Opportunity Cost is the cost of next best alternative foregone (sacrifised), while choosing an alternative. Interest on money deposits is the opportunity cost sacrifised, while keeping money as cash in hand.

    If interest rate on money deposits increases: the opportunity cost of holding money, in form of interest, increases. So, people tend to hold less cash in hand.

    If interest rate on money deposits decreases: the opportunity cost of holding money, in form of interest, decreases. So, people tend to hold more cash in hand.
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