When a change in the price level causes a change in the purchasing power of currency, which then changes planned real expenditures 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 given scenario describes the real-balance effect, which occurs when a change in the price level leads to a change in the value of money, affecting planned real expenditures at all income levels. When the price level increases, the value of money decreases, and so does the purchasing power of currency, reducing real expenditure. The opposite occurs when the price level falls. Therefore, the correct answer is A) the real-balance effect.

When a Change in the Price Level Causes a Change