Question

According to the real wealth effect (or real balance effect), a decrease in the price level...?

a) Increases the real value of money holdings and stimulates spending.
b) Decreases the real value of money holdings and reduces spending.
c) Has no effect on the real value of money holdings.
d) Leads to deflation.

Answer 1

The real wealth effect states that a decrease in the price level decreases the real value of money holdings and reduces spending.

Step-by-step explanation:

The real wealth effect, also known as the real balance effect, states that a decrease in the price level decreases the real value of money holdings and reduces spending. As the price level decreases, the buying power of money increases, which makes people feel wealthier. This, in turn, stimulates spending as people have more money and are more willing to make purchases.