The real balances effect says that an increase in the price level
A)Increases the price of U.S.produced goods,causing Americans to buy more imported goods.
B)Increases the price of U.S.produced goods,causing foreign consumers to buy fewer U.S.goods.
C)Increases the need to borrow,which drives up interest rates and reduces loan-financed purchases.
D)Reduces the real value of a fixed amount of savings,which reduces the purchase of goods and services.

Question

Quizplus · Accepted Answer

The real balances effect refers to a reduction in the purchasing power of savings due to an increase in the price level, leading to a decrease in the quantity of goods and services purchased. This can be explained by the fact that as the price level increases, the value of money and savings decreases, meaning that individuals are unable to purchase the same quantity of goods and services they once could with their fixed amount of savings. Thus, they may reduce their purchases, which could lead to a decrease in aggregate demand. Option D captures this explanation.

The Real Balances Effect Says That an Increase in the Price