The real balances effect predicts that higher prices:
A) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
B) make people worse off by reducing the value of their wealth, leading them to save less and spend more.
C) make people better off by increasing the value of their wealth, leading them to save less and spend more.
D) increase borrowing, leading to higher interest rates and less investment.

Question

Quizplus · Accepted Answer

The real balances effect suggests that as prices increase, the real value of people's wealth decreases, making them feel poorer. This typically leads to an increase in saving and a decrease in spending as individuals attempt to rebuild their wealth.

The Real Balances Effect Predicts That Higher Prices