When a change in the price level causes a change in the purchasing power of currency,which then changes the desired rate of consumption at all income levels,it is called
A)the real-balance effect.
B)the substitution effect.
C)the open-economy effect.
D)the interest rate effect.

Question

Quizplus · Accepted Answer

The real-balance effect describes the effect of a change in price level on the real value of money, and how that impacts people's purchasing power and desired rate of consumption at all income levels. It is related to the idea that as the price level increases, the real value of people's money decreases, leading to a decrease in their ability to buy goods and services, and a decrease in their desired rate of consumption.

When a Change in the Price Level Causes a Change