According to the real-balance effect, an increase in the price level will
A) leave total planned real expenditures unchanged since the price level of all goods has increased.
B) decrease total planned real expenditures because of an increase in interest rates.
C) lead to a corresponding increase in total planned real expenditures since businesses are now earning higher profits.
D) decrease total planned real expenditures as a result of a decrease in the real value of money balances.

Question

Quizplus · Accepted Answer

The real-balance effect suggests that an increase in the price level will decrease total planned real expenditures as a result of a decrease in the real value of money balances. As the price level increases, the purchasing power of money decreases, and people need to spend more money to buy the same amount of goods and services. This reduces their real money balances, which decreases their ability and willingness to spend. Therefore, an increase in the price level decreases total planned real expenditures.

According to the Real-Balance Effect, an Increase in the Price