When expenditures change due to changes in the real value of money caused by variations in the price level, this is known as the
A) interest rate effect.
B) real-balance effect.
C) open economy effect.
D) aggregate balances effect.

Question

Quizplus · Accepted Answer

The term "real-balance effect" refers to the impact of changes in the overall price level on the purchasing power of money. When prices increase, the real value of money decreases, and people will be able to buy fewer goods and services with the same amount of money. This, in turn, will reduce their overall expenditure as they become less able to afford the same level of consumption. Conversely, if prices decrease, the real value of money increases, leading to an increase in expenditures as people will be able to afford more with the same amount of money.

When Expenditures Change Due to Changes in the Real Value