The _____ is the change in the purchasing power of assets that causes spending to change when the price level changes.
A)purchasing power effect
B)interest rate effect
C)substitution effect
D)income effect
E)real-balance effect

Question

Quizplus · Accepted Answer

The real-balance effect refers to the change in purchasing power of assets (such as cash, savings, and other financial instruments) that results from a change in the price level. When the price level decreases, the real value of assets increases, which encourages people to spend more. Conversely, when the price level increases, the real value of assets decreases, which discourages people from spending as much. Therefore, the real-balance effect is an important driver of changes in aggregate demand.

The _____ Is the Change in the Purchasing Power of Assets