The real-balance effect indicates that at higher price levels
A) the real value of money holdings fall, resulting in decreased spending.
B) the real value of money holdings increase, resulting in increased saving.
C) the purchasing power of money will increase.
D) the value of the dollar will increase.

Question

Quizplus · Accepted Answer

The real-balance effect states that at higher price levels, the real value of money holdings fall, resulting in a decrease in spending. This is because people feel poorer when the prices of goods and services are higher, and they are less likely to spend money.

The Real-Balance Effect Indicates That at Higher Price Levels