Which of the following is an example of the real balances effect,assuming the U.S.price level decreases?
A) The purchasing power of money increases and people buy more goods.
B) U.S.goods are less expensive for foreigners to buy and exports increase.
C) U.S.production costs stay constant and profits for businesses decrease.
D) The demand for loans decreases so interest rates decline and loan-financed purchases increase.

Question

Quizplus · Accepted Answer

Real balances effect refers to the increase in purchasing power of individuals due to a decrease in the price level. As the prices decrease, the same amount of money can buy more goods. Therefore, people tend to buy more goods, resulting in an increase in overall consumption. Choice B refers to the net export effect, Choice C refers to the cost-push inflation, and Choice D is the interest-rate effect.

Which of the Following Is an Example of the Real