The real-balances effect on aggregate demand suggests that a
A) lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
B) lower price level will decrease the real value of many ﬁnancial assets and therefore cause an increase in spending.
C) lower price level will increase the real value of many ﬁnancial assets and therefore cause an increase in spending.
D) higher price level will increase the real value of many ﬁnancial assets and therefore cause an increase in spending.

Question

Quizplus · Accepted Answer

The real-balances effect on aggregate demand suggests that a lower price level will increase the purchasing power of individuals' financial assets (such as their savings and investments), leading to an increase in overall spending. As a result, choice C, which states that a lower price level will increase the real value of financial assets and therefore cause an increase in spending, is the correct answer. Choice A is incorrect because it suggests that a lower price level will decrease the demand for money, resulting in lower interest rates and increased consumption and investment spending, which is not directly related to the real-balances effect. Choice B is also incorrect because it suggests that a lower price level will decrease the real value of financial assets, which is the opposite of what the real-balances effect suggests. Choice D is incorrect because it suggests that a higher price level will increase the real value of financial assets, which is also the opposite of what the real-balances effect suggests.

The Real-Balances Effect on Aggregate Demand Suggests That a