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real balances


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The money supply divided by a suitable price index. This determines the quantity of real goods and services that can be purchased. Changes in real balances are a function of changes in the money supply and changes in the price level: real balances rise if the money supply increases proportionally faster than the price level. The amount of real balances people wish to hold is an increasing function of their real incomes, and may be a decreasing function of interest rates and/or the rate of inflation.

Subjects: Economics.


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