Which of the following is an example of the real-balances effect?
A)Workers are better able to negotiate a wage increase when the price level increases.
B)Nominal interest rates will increase when the price level increases.
C)Consumption decreases because products are more expensive when the price level increases.
D)Consumption decreases when the price level increases,because future prices are expected to fall.
E)The real value of savings will decrease when the price level increases.

Question

Quizplus · Accepted Answer

The real-balances effect refers to changes in the purchasing power of money as the price level changes. As the price level increases, the real value of savings decreases, reducing the purchasing power of money held in savings accounts. Therefore, choice E is the best example of the real-balances effect. Choices A, B, C, and D refer to other macroeconomic concepts such as wage negotiation, nominal interest rates, consumption, and expected future prices, but do not specifically reflect changes in the real value of money due to changes in the price level.

Which of the Following Is an Example of the Real-Balances