What Is One Implication of the Real-Balance Effect

question 17

Multiple Choice

What is one implication of the real-balance effect?

• A) The part of your wealth that you hold in the form of cash loses some of its value as the price level rises.
• B) When the price level rises, people have an incentive to work harder in order to earn a higher income.
• C) When the price level falls, most consumers reallocate their spending so as to have an equal balance between necessities and luxuries.
• D) Aggregate demand and aggregate supply can never reach long-run equilibrium.

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Definitions:

Credit Terms

The conditions under which credit is extended by a lender to a borrower, including repayment schedule, interest rate, and the amount of loan.

Net Realizable Value

The estimated selling price of goods, minus the cost of their sale or completion and any necessary disposal expenses.

Allowance for Doubtful Accounts

A concession for estimated bad debts that will arise from accounts receivable that may not be collectible.

Bad Debt Expense

An accounting term referring to the recognition of unrecoverable amounts owed to a company by debtors, treated as a cost on the income statement.