-Refer to Exhibit 9-6.If the economy is self-regulating and currently at point 1,the real balance effect is operational and relevant between points

Question

Quizplus · Accepted Answer

The real balance effect is operational when the economy is at point 1 and moves to point 3. At point 1, the economy is in equilibrium. When the money supply increases, the real money supply increases, which leads to a decrease in the interest rate. This decrease in the interest rate leads to an increase in investment and aggregate demand, which moves the economy to point 3.