High levels of inflation ________ the real value of money and, hence, ________ short-run equilibrium output.
A)reduce; increase
B)increase; decrease
C)reduce; decrease
D)increase; increase

Question

Quizplus · Accepted Answer

One reason for the downward slope of the AD curve is the effect of inflation on the real value of money held by households and businesses. At high levels of inflation, the purchasing power of money held by the public declines, reducing the public's real wealth. This may cause households to restrain consumption spending, thereby reducing short-run equilibrium output.

High Levels of Inflation ________ the Real Value of Money