The real-balances effect indicates that
A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
B) a lower price level will decrease the real value of many ﬁnancial assets and therefore reduce spending.
C) a higher price level will increase the real value of many ﬁnancial assets and therefore increase spending.
D) a higher price level will decrease the real value of many ﬁnancial assets and therefore reduce spending.

Question

Quizplus · Accepted Answer

The real-balances effect suggests that when the price level rises, the real value of money and other financial assets with fixed nominal values decreases, leading to reduced consumer wealth and spending.

The Real-Balances Effect Indicates That