The Real Balances Effect Predicts That Higher Prices

question 47

Multiple Choice

The real balances effect predicts that higher prices:

• A) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
• B) make people worse off by reducing the value of their wealth, leading them to save less and spend more.
• C) make people better off by increasing the value of their wealth, leading them to save less and spend more.
• D) increase borrowing, leading to higher interest rates and less investment.

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Definitions:

Factory Overhead

All manufacturing costs that are not directly associated with the cost of raw materials or direct labor, often including costs related to maintaining factory operations.

Direct Materials

Raw materials directly used in the manufacturing process of a product, easily traceable and integral to the finished good.

Direct Labor

The wages and other costs for labor that is directly involved in the manufacturing or production of goods or services.

Operating Income

A measure of a company's profit excluding one-off items and costs not directly related to its core operations, such as interest and taxes.