The Real Balances Effect Predicts That Higher Prices

question 63

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.
• E) make domestic goods relatively more expensive, increasing the demand for domestic goods and decreasing the demand for foreign goods.