The real balance effect is the impact on real GDP caused by the ______ relationship between the price level and the real value of financial assets. A. Independent B. Direct C. Inverse D. Linear
The real balance effect is the impact on real
A. Independent
B. Direct
C. Inverse
D. Linear
The effect of shifts in the actual value of cash balances on spending. The true buying power of the money people already carries goes down during inflation, as prices increase. This is supposed to make individuals more likely to invest their money and less likely to spend it. This could gradually put inflation to a halt with a steady nominal money supply. During a crisis, the Pigou effect refers to a real balance effect: when prices decline, the real buying power of the stock of money increases, which can inevitably contribute to increased expenditure.
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