The real-balances effect on aggregate demand suggests that a:
A) Lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending
B) Lower price level will decrease the real value of many financial assets and therefore cause an increase in spending
C) Lower price level will increase the real value of many financial assets and therefore cause an increase in spending
D) Higher price level will increase the real value of many financial assets and therefore cause an increase in spending

Question

Quizplus · Accepted Answer

The real-balances effect on aggregate demand suggests that as the price level decreases, the purchasing power of money (real balances) increases. This increase in real balances leads to an increase in consumption and investment spending, which ultimately results in an increase in aggregate demand. This is because people and businesses can now afford to purchase more goods and services with their higher purchasing power. Therefore, choice C is the best answer as it states that a lower price level will increase the real value of many financial assets and cause an increase in spending. Choices A, B, and D are incorrect as they do not accurately describe the real-balances effect on aggregate demand.

The Real-Balances Effect on Aggregate Demand Suggests That A