The real-balance effect shows that
A) aggregate demand is upward sloping.
B) a higher price level leads to higher interest rates.
C) a lower price level will increase the purchasing power of currency and increase personal consumption.
D) consumption and the price level are positively correlated.

Question

Quizplus · Accepted Answer

The real-balance effect shows that a lower price level will increase the purchasing power of currency and increase personal consumption. As the price level decreases, the money people hold in their wallets or bank accounts has greater purchasing power, leading them to consume more goods and services. Therefore, the answer is C.

The Real-Balance Effect Shows That