Holding nominal money balances constant, a decrease in the price level
A) causes the real value of the money balances to increase, in turn increasing total planned real expenditures.
B) causes the real value of the money balances to decrease, in turn decreasing total planned real expenditures.
C) causes the real value of the money balances to increase, thereby increasing the interest rate.
D) generates a reduction in the value of the money balances, leading to higher interest rates and a decrease in total planned real expenditures.

Question

Quizplus · Accepted Answer

If nominal money balances are held constant, a decrease in the price level means that the real value of these nominal balances will increase. This implies that individuals and firms will have more purchasing power to spend on goods and services, leading to an increase in total planned real expenditures.

Holding Nominal Money Balances Constant, a Decrease in the Price