Question

The real balance effect is the change in

Group of answer choices

purchasing power that results from a change in income.

the amount of money one has that results from a change in income.

purchasing power that results from a change in the price level.

the amount of money one has that results from a change in the price level.

none of the above

Answer 1

The real balance effect was first introduced by Professor Pigou. According to professor Pigou, the real balance effect is the change in the purchasing power(real money) that results from a change in the price level. More broadly, it can be explained as follows: If the price level Decreases, then the purchasing power of the money stock held by people increases which leads to an increase in spending and vice versa. The effect of the change in purchasing power caused by change in price level is the real balance effect or Pigou Effect.

Hence, the real balance effect is the change in purchasing power that results from a change in the price level.

Therefore, third option is correct