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

Quizplus · Accepted Answer

The real-balances effect suggests that a higher price level reduces the purchasing power of money, decreasing the real value of financial assets, which leads to reduced spending.

The Real-Balances Effect Indicates That