Assume that a firm has $100 million in real assets and $90 in real liabilities.If the price level falls by ten percent,the real value of liabilities would ________.

Question

Quizplus · Accepted Answer

When the price level falls, the nominal value of liabilities remains the same, but the real value increases because the liabilities represent a larger claim on the now more valuable (in real terms) assets. A 10% decrease in the price level increases the real burden of the nominal liabilities, making them effectively closer to the value of the assets.

Assume That a Firm Has $100 Million in Real Assets