The real-balance effect refers to
A) the real interest rate.
B) the production of real goods and services as opposed to financial instruments.
C) the prices of goods and services.
D) the real value of cash balances that a person is holding.

Question

Quizplus · Accepted Answer

The real-balance effect refers to the impact that changes in the price level have on the real value of cash balances that a person is holding. As prices increase, the real value of cash balances decreases, and people may cut back on their spending, leading to a decrease in aggregate demand. When prices decrease, the real value of cash balances increases, leading people to increase their spending, and thus, an increase in aggregate demand.

The Real-Balance Effect Refers to