What does the real-balances effect mean?
A)A higher price level will lead to an increase in the rate of interest,thereby causing a decrease in consumption.
B)A lower price level will lead to an increase in the rate of interest,thereby causing a decrease in consumption.
C)A higher price will increase the real value of financial assets,thereby causing an increase in consumption.
D)A higher price will decrease the real value of financial assets,thereby causing an increase in consumption.
E)A higher price will decrease the real value of financial assets,thereby causing a decrease in consumption.

Question

Quizplus · Accepted Answer

The real-balances effect suggests that an increase in the price level reduces the real value or purchasing power of financial assets with fixed nominal value, leading to a decrease in consumption.

What Does the Real-Balances Effect Mean