Overview

real balance effect


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The effect on spending of changes in the real value of money balances. During inflation, as prices rise, the real purchasing power of the money people already hold goes down. This is expected to make people more likely to save and less likely to spend their incomes. With a constant nominal money supply, this should eventually bring inflation to a halt. The Pigou effect refers to a real balance effect during a depression: as prices fall, the real purchasing power of the stock of money rises, which should eventually lead to increased spending.

Subjects: Economics.


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