Opportunity Cost of Holding Money - Key Concept

The money demand curve plots the relationship between the price of money and the amount of money in your pocket or in your checking account. The interest rate on a bond is a measure of the opportunity cost of holding money. The higher the interest rate is, the higher the opportunity cost of holding money. Higher interest rates cause people to hold less money in their pockets and in their checking accounts. In contrast, when interest rates are lower, people hold more money than they would otherwise, and hold less of their wealth in interest-earning assets like bonds.