Which of the following best describes how the real balance effect works?
A) The price level falls,purchasing power rises,a person's monetary wealth rises,and the person buys fewer goods and services.
B) The price level rises,purchasing power rises,a person's monetary wealth decreases,and the person buys more goods and services.
C) The price level rises,purchasing power falls,a person's monetary wealth falls,and the person buys fewer goods and services.
D) The price level falls,purchasing power rises,a person's monetary wealth falls,and the person buys fewer goods and services.
E) none of the above

Question

Quizplus · Accepted Answer

The real balance effect works by reducing purchasing power when the price level rises. As the price level rises, the value of a person's monetary wealth falls, and they are unable to buy as many goods and services as before. This reduction in purchasing power leads to a decrease in aggregate demand, which can lead to a decrease in economic activity.

Which of the Following Best Describes How the Real Balance