What is one implication of the real-balance effect?
A) The part of your wealth that you hold in the form of cash loses some of its value as the price level rises.
B) When the price level rises, people have an incentive to work harder in order to earn a higher income.
C) When the price level falls, most consumers reallocate their spending so as to have an equal balance between necessities and luxuries.
D) Aggregate demand and aggregate supply can never reach long-run equilibrium.

Question

Quizplus · Accepted Answer

The real-balance effect suggests that as the price level rises, the real value of cash or wealth held by individuals decreases. This implies that consumers may have less purchasing power, as they need more money to purchase the same amount of goods and services as before, leading to a decrease in overall consumption and potentially lower aggregate demand.

What Is One Implication of the Real-Balance Effect