The real-balances effect indicates that inﬂation makes the public feel wealthier and they therefore
spend more out of their current incomes.

Question

Quizplus · Accepted Answer

The real-balances effect actually works in the opposite way - when there is inflation, the purchasing power of people's money decreases, making them feel less wealthy, and therefore they may spend less out of their current incomes.

The Real-Balances Effect Indicates That Inﬂation Makes the Public Feel