If your income stays the same and the price level increases, you will buy fewer goods and services due to the
A) interest rate effect.
B) real-balance effect.
C) open economy effect.
D) aggregate balances effect.

Question

Quizplus · Accepted Answer

The real-balance effect states that an increase in the price level decreases the purchasing power of money, leading to a decrease in the quantity of goods and services that can be purchased with a fixed income. Therefore, if the income stays the same and the price level increases, the consumer will face a reduction in the real value of his/her assets and will buy fewer goods and services. The interest rate effect, open economy effect, and aggregate balances effect are not directly related to changes in the price level and income.

If Your Income Stays the Same and the Price Level