1.According to the "real-balances effect," if prices
A-increase, the purchasing power of assets will decrease, so spending at each income level should rise.
B-decline, the purchasing power of assets will rise, so spending at each income level should rise.
C-increase, the purchasing power of assets will rise, so spending at each income level should rise.
D-decline, the purchasing power of assets will decrease, so spending at each income level should rise.

.According to the "real-balances effect," if prices decline, the purchasing power of assets will rise, so spending at each income level should rise.

The real-balance effect is considered as one of the three basic effects which indicate why aggregate expenditures are inversely related to the price level.

The real-balance effect will work like this: A higher price level always decreases the purchasing power of the money which results in a decrease in consumption expenditures or investment expenditures or government purchases and net exports.

A lower price level will also have the opposite affect which will cause an increase in the purchasing power of money that results in an increase in consumption expenditures, investment expenditures, government purchases, and net exports.

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