The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption is known as the:
A) real balances effect.
B) interest rate effect.
C) foreign purchases effect.
D) income effect.
E) aggregate demand effect.

Question

Quizplus · Accepted Answer

The real balances effect is directly related to the decrease in purchasing power of financial assets due to higher prices. As prices rise, the real value of financial assets decreases, and therefore, there is a reduction in consumption. The other options, such as the interest rate effect, foreign purchases effect, income effect, and aggregate demand effect, are related to different factors that affect the overall level of demand in the economy.

The Idea That Higher Prices Reduce the Purchasing Power of Financial