When Prices Rise, Consumers and Businesses Hold Larger Money Balances

question 105

Multiple Choice

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the

• A) interest rate effect.
• B) real balance effect.
• C) investment effect.
• D) disinvestment effect.

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