The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve.
A) money demand; LM
B) the money supply; LM
C) consumer spending; IS
D) government spending; IS

Question

Quizplus · Accepted Answer

The Pigou effect suggests that falling prices increase the real value of money, which boosts consumer spending. This, in turn, shifts the IS curve, which represents the relationship between interest rates and levels of income that are in equilibrium in the goods market.

The Pigou Effect Suggests That Falling Prices Will Increase Income