In the financial sector, a central bank implements a tight monetary policy, leading to a significant increase in market interest rates. According to the liquidity preference theory of money, what is the direct effect of this interest rate increase on the opportunity cost of holding money and the speculative demand for money?
The opportunity cost of holding money increases because the return on alternative financial assets is higher, and the speculative demand for money decreases because agents expect bond prices to rise in the future.
The opportunity cost of holding money increases because cash becomes less liquid relative to bonds, and the speculative demand for money increases as agents hold cash to buy cheaper bonds later.
The opportunity cost of holding money decreases because inflation expectations fall, and the speculative demand for money decreases because agents prefer to lock in low bond yields.
The opportunity cost of holding money decreases because the yield on cash deposits rises, and the speculative demand for money increases because bonds become riskier.
