What is the difference between the real balances effect and the wealth effect?
A)The former involves income changes while the latter does not.
B)The latter involves income changes while the former does not.
C)The former involves price level changes while the latter involves changes in the value of assets.
D)There is no significant difference.

Question

Quizplus · Accepted Answer

The real balances effect refers to the impact of a price level change on the real value of money balances held by individuals, leading to changes in their purchasing power. In contrast, the wealth effect refers to the impact of changes in the value of assets, such as stocks or real estate, on consumer spending. Thus, the former involves price level changes, while the latter involves changes in the value of assets.

What Is the Difference Between the Real Balances Effect and the Wealth