Empirical Studies Indicate That the Velocity of Money Tends to Increase

Multiple Choice

Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true?

A) When the velocity of money is high, banks will increase their lending interest rates.
B) An increase in the growth rate of GDP will cause the velocity of money to increase.
C) The higher interest rates increase the cost of holding money balances and, thereby, increase the velocity of money.
D) Both the velocity of money and interest rates will rise when the inflation rate falls.