If the price level increases,the value of money balances held by individuals,firms,government,and foreigners decreases,and spending decreases.This is an example of
A)the open economy effect.
B)the interest rate effect
C)the real-balance effect.
D)the deflation effect.

Question

Quizplus · Accepted Answer

The statement refers to the real-balance effect, which indicates that an increase in the price level reduces the purchasing power of money balances held by individuals, firms, government, and foreigners. As a result, spending decreases. The open economy effect refers to the impact of international trade on the economy, the interest rate effect refers to the relationship between prices and interest rates, and the deflation effect refers to the impact of deflation on the economy. None of these options capture the phenomenon described in the statement.

If the Price Level Increases,the Value of Money Balances Held