the idea that higher prices reduce the purchase and power of financial assets and lead to less consumption and more saving is known as the A. Foreign purchases effect B. Income effect C. Aggregate demand effect D. Real balances affect
the idea that higher prices reduce the purchase and power of financial assets and lead to less consumption and more saving is known as the A. Foreign purchases effect B. Income effect C. Aggregate demand effect D. Real balances affect
Chapter10: Aggregate Demand And Supply
Section: Chapter Questions
Problem 16SQ
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Question
the idea that higher prices reduce the
A. Foreign purchases effect
B. Income effect
C. Aggregate demand effect
D. Real balances affect
Expert Solution
Step 1
When prices increase ie there is inflation, the purchasing power of people reduces. They need to pay more currency for the same good. This causes them to save more and spend less.
This effect is known as the real balances effect.
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