The real balance effect works through a change in the value of
A) monetary assets in response to changes in the unemployment rate.
B) nonmonetary assets in response to changes in the unemployment rate.
C) monetary assets in response to changes in the price level.
D) nonmonetary assets in response to changes in the price level.

Question

Quizplus · Accepted Answer

The real balance effect works through a change in the value of monetary assets in response to changes in the price level. As prices increase, the purchasing power of money decreases, which reduces the real value of monetary assets (such as cash, savings, and other financial holdings). This, in turn, reduces the amount of goods and services that people can afford to purchase, which can lead to decreased economic activity and employment. Conversely, when prices decrease, the real value of monetary assets increases, which can lead to increased consumer spending and economic activity.

The Real Balance Effect Works Through a Change in the Value