The real balance effect describes the change in
A) checking account balances that occur when the money supply increases or decreases.
B) the value of physical assets (e.g.,houses)that results from a change in the price level.
C) the output producers produce as they attempt to balance their production in response to changes in consumers' demand.
D) the value of cash holdings that results from a change in the price level.
E) the balance of cash holdings that results from a change in the amount of income earned.

Question

Quizplus · Accepted Answer

The real balance effect describes the change in the value of cash holdings that results from a change in the price level. Specifically, when the price level increases, the purchasing power of an individual's cash holdings decreases, leading to a decrease in real spending and ultimately a decrease in aggregate demand. Conversely, when the price level decreases, the purchasing power of an individual's cash holdings increases, leading to an increase in real spending and ultimately an increase in aggregate demand.

The Real Balance Effect Describes the Change in