As prices rise. People will want to keep more money as cash and in bank accounts This is called ?
Correct answer: A. real balance effect.
- A. real balance effect.
- B. cash ratio.
- C. money illusion.
- D. menu costs of inflation.
Explanation
The real-balance effect refers to the effect of the purchasing power of money holdings on spending and money demand; when prices rise, people may need larger nominal balances for transactions. Cash ratio concerns bank reserves, while money illusion is confusing nominal values with real values.
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