The real-balance effect pertains to the effect of:
A) Consumer spending on the price level, while the wealth effect refers to the impact of changes in wealth on consumer spending
B) Wealth-changes on aggregate demand, while the wealth effect refers to the impact of changes in the price level on the real value of wealth
C) Changes in interest rate on aggregate demand, while the wealth effect refers to the impact of changes aggregate demand on people's wealth
D) Price-changes on aggregate demand, while the wealth effect refers to the impact of changes in wealth on aggregate demand

Question

Quizplus · Accepted Answer

The real-balance effect pertains to the impact of price changes on aggregate demand. Specifically, it refers to the idea that when the price level increases, the real value of people's wealth decreases, which leads them to decrease their spending, thus reducing aggregate demand. The wealth effect, on the other hand, refers to the impact of changes in wealth on consumer spending, and is not directly related to the price level. Therefore, the best choice is D, which correctly matches the real-balance effect with price-changes on aggregate demand.

The Real-Balance Effect Pertains to the Effect Of