The real-balances effect suggests that a:
A)lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
B)lower price level will decrease the real value of many financial assets and therefore cause an increase in spending.
C)lower price level will increase the real value of many financial assets and therefore cause an increase in spending.
D)higher price level will increase the real value of many financial assets and therefore cause an increase in spending.

Question

Quizplus · Accepted Answer

The real-balances effect suggests that a decrease in the price level will increase the purchasing power or real value of consumers' financial assets, such as cash and savings, leading to an increase in consumption spending. This is because consumers will have more buying power to purchase goods and services. Therefore, the lower price level will increase the real value of many financial assets and therefore cause an increase in spending.

The Real-Balances Effect Suggests That A