Question

According to the real balances effect, when the price level: Falls, cash is worth less and therefore people buy less. Falls, cash is worth more and therefore people buy more. Rises, cash is worth less and therefore people buy more. Rises, cash is worth more and therefore people buy less.

Answer 1

Answer:

Falls, cash is worth more and therefore people buy more

Explanation:

When price falls, it is known as deflation. When prices fall, goods and services become cheaper and people buy more. When price level falls, less money is needed to buy goods and services ; the purchasing power of money increases.

When price level increases, it is known as inflation. When price level increases, more money is needed to buy goods and services. The purchasing power of money falls. Prices increase and goods and services become more expensive, so people buy less.

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