The real-balances effect indicates that:

A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.

B. a lower price level will decrease the real value of many financial assets and therefore reduce spending.

C. a higher price level will increase the real value of many financial assets and therefore increase spending.

D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Question

Business

Yadiel Sullivan

20 November, 09:09

The real-balances effect indicates that:

A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.

B. a lower price level will decrease the real value of many financial assets and therefore reduce spending.

C. a higher price level will increase the real value of many financial assets and therefore increase spending.

D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.

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Answers (1)

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Sebastian Molina · Answer 1

D: a higher price level will decrease the real value of money and many financial assets, therefore reduce spending

Explanation:

A higher price level decreases the purchasing power of money resulting in a decrease in consumption expenditures, investment expenditures, government purchases, and net exports.

The real-balanced effect is based on the realistic presumption that the supply of money in circulation is constant at any given time. Money is what the four basic macroeconomic sectors use to purchase production. How much production they are able to purchase (that is, aggregate expenditures) depends on the amount of money in circulation relative to the prices of the goods and services produced (that is, the price level). When the price level changes, the purchasing power of the available money supply also changes and so too do aggregate expenditures. A higher price level means money can buy less production. A lower price level means money can buy more production.