For each of the following scenarios, determine whether the situation described c

Question

For each of the following scenarios, determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign-purchases effect.

    a. As a result of an increase in the price level, the cost of borrowing increases, which causes people to buy fewer cars.

A. Foreign-purchases effect

B.Interest-rate effect

C.Real-balances effect

    b. When the price level decreases, restaurants become busier as more people purchase restaurant meals.

A.Foreign-purchases effect

B.Real-balances effect

C.Interest-rate effect

Explanation / Answer

(a) Option (B)

Since cost of borrowing equals interest rate, this is the interest rate effect.

(b) Option (B)

Lower price level increases purchasing power and increases real wealth (real balance), so this is real balances effect.

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.