The Real-Balances Effect Indicates That

question 275

Multiple Choice

The real-balances effect indicates that

• A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
• B) a lower price level will decrease the real value of many financial assets and therefore reduce spending.
• C) a higher price level will increase the real value of many financial assets and therefore increase spending.
• D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

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Definitions:

Fixed Expenses

Costs that do not vary with the level of production or sales over a given period, such as rent or salaries.

Margin Of Safety

The difference between actual or budgeted sales and the break-even point, indicating the risk level of not covering fixed costs.

Contribution Format

A form of income statement where costs are divided into variable and fixed, and the contribution margin is calculated to determine profitability.

Income Statement

A financial statement that reports a company's financial performance over a specific accounting period, displaying revenue, expenses, and profit or loss.