The real-balance effect explains a shift in aggregate demand, while the wealth effect explains a
movement along the AD curve.

Question

Quizplus · Accepted Answer

The real-balance effect explains a movement along the aggregate demand (AD) curve due to changes in the purchasing power of money when the price level changes, while shifts in the AD curve can be caused by factors other than the real-balance effect, such as changes in consumer confidence, fiscal policy, or investment spending. The wealth effect, which is related to the real-balance effect, also contributes to movements along the AD curve by changing the amount of consumption based on changes in consumers' real wealth.

The Real-Balance Effect Explains a Shift in Aggregate Demand, While