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.

1. Real-balances effect
2. Foreign-purchases effect
3. Interest-rate effect

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

1. Real-balances effect
2. Foreign-purchases effect
3. Interest-rate effect

Answer 1

Answer:

A)Interest-rate effect

B)Real-balances effect

Explanation:

✓The interest rate effect can be regarded as change in borrowing as well as spending behaviors as a consequence or result of adjustment of interest rate. As a general rule, interest are been set by central bank of the nation, then consumer banks will then extend similar interest rates across their customers. For instance

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

✓ In economics, real balance effect can be regarded as "Pigou effect" which can be regarded as stimulation of output as well as employment which is been caused as a result of increased consumption through a rise in real balances of wealth, especially during time of deflation. Instance of this is

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