The real balances effect is the impact on real GDP caused by the ____ relationship between the price level and the real value of financial assets.
A) direct
B) inverse
C) independent
D) linear

Question

Quizplus · Accepted Answer

The real balances effect is the impact of changes in the price level on real GDP due to the inverse relationship between the price level and the real value of financial assets. As the price level increases, the real value of financial assets decreases, leading to a decrease in consumer spending and a decrease in real GDP. Conversely, a decrease in the price level increases the real value of financial assets, leading to an increase in consumer spending and an increase in real GDP.

The Real Balances Effect Is the Impact on Real GDP