As the price level falls the purchasing power of your currency increases. This is an example of:

Question

Quizplus · Accepted Answer

The real balance effect states that as the price level falls, the purchasing power of individuals' money balances increases, causing an increase in consumption and hence aggregate demand. Thus, option B is the correct choice. The interest rate effect and the substitution effect are related to changes in the interest rate and relative prices, respectively, while the valuation effect of prices is not a widely recognized economic concept.

As the Price Level Falls the Purchasing Power of Your