The real balances effect says that an increase in the price level
A)Increases the price of U.S.produced goods,causing Americans to buy more imported goods.
B)Increases the price of U.S.produced goods,causing foreign consumers to buy fewer U.S.goods.
C)Increases the need to borrow,which drives up interest rates and reduces loan-financed purchases.
D)Reduces the real value of a fixed amount of savings,consequently reducing the quantity of goods and services purchased.

Question

Quizplus · Accepted Answer

The real balances effect states that an increase in the price level reduces the real value of a fixed amount of savings, which then reduces the quantity of goods and services purchased. This occurs because the increase in prices means that each unit of currency can purchase less than before, thereby decreasing the purchasing power of savings. As a result, people either have to reduce the quantity of goods and services purchased or borrow more money to maintain their previous level of consumption.

The Real Balances Effect Says That an Increase in the Price