Answered: The idea that higher prices reduce the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The idea that higher prices reduce the purchasing 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 effect.

Expert Solution

Step 1

The purchasing power refers to the value of a currency expressed in terms of the amount that one unit of money can buy of goods or services. Inflation reduces the value of a currency's purchasing power, which increases the price of goods and services while deflation increase their purchasing power.

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