Holding nominal money balances constant,an increase in the price level
A)causes the real value of the money balances to increase,in turn increasing the quantity of goods and services demanded.
B)causes the real value of the money balances to decrease,in turn decreasing the quantity of goods and services demanded.
C)causes the real value of the money balances to increase,thereby increasing the interest rate.
D)generates a reduction in the value of the money balances,leading to higher interest rates and a decrease in the quantity of goods and services demanded.

Question

Quizplus · Accepted Answer

An increase in the price level reduces the purchasing power of nominal money balances. This means that the real value of money balances decreases, thereby reducing the quantity of goods and services demanded. This happens because people need more money to buy the same amount of goods and services at a higher price level, leading them to reduce their spending. So, choice B is the correct option.

Holding Nominal Money Balances Constant,an Increase in the Price Level