What does the real-balances effect refer to?
A)The effect that a change in savings has on the real rate of interest.
B)The level of income where it is exactly equal to the level of consumption.
C)The effect that a change in interest rates has on the real value of savings.
D)The effect that a change in the price level has on the real value of wealth.
E)The effect of a change in consumption on the real value of wealth.

Question

Quizplus · Accepted Answer

The real-balances effect refers to the effect that a change in the price level has on the real value of wealth. As the price level rises, the purchasing power of a given amount of money decreases, so people feel less wealthy and tend to reduce their spending, which can lead to a decrease in aggregate demand.

What Does the Real-Balances Effect Refer To