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Econ: What is the Real Balance Effect? 0 Views


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What is the Real Balance Effect? The Real Balance Effect, also called the Pigou Effect after economist Arthur Pigou, posits that deflated prices increases employment, investment, consumption, and more wealth, whereas inflated prices result in decreased purchasing power, leading to decreased consumption and investment.

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Transcript

00:00

And finance Allah shmoop What is the rial balance effect

00:07

Riding a unit cycle on a tightrope walking home from

00:10

a raucous New Year's Eve party Examples of one kind

00:14

of real balance of that Yeah well another kind relates

00:18

to economic decisions Well the real battle Its effect has

00:21

to do with the purchasing power of money It posits

00:25

that a change in price levels alters how much stuff

00:28

you can buy that is assuming your income remains the

00:31

same while you make four grand a month Take out

00:34

taxes and rent and utilities and insurance and all the

00:36

other basic stuff that eats away at your disposable income

00:39

Now you have fifteen hundred dollars left in cash to

00:42

you know spend on stuff each month but you still

00:45

have to eat You know because of a rare gastro

00:48

intestinal disorder you have to eat special snails with every

00:51

meal There's a certain enzyme that your body can't produce

00:54

That only comes from this particular natural snail meat Yes

00:57

eat them or die So snail smoothies for breakfast Snail

01:01

sandwiches for lunch Snail ala King for dinner and for

01:04

a late night snack Deep fried snail poppers Well the

01:08

snails you need are usually eight bucks a pound In

01:10

a typical month you spend about four hundred dollars on

01:12

them which leaves you eleven hundred dollars out of your

01:14

budget for you know stuff money Teo You know go

01:17

to the movies or buy video games or purchase gold

01:20

grills for your teeth Like Ryan locked Yeah whatever else

01:23

you need but this month you get bad news There's

01:26

been an outbreak of rare snail Ebola that has ravaged

01:30

the population of the special snails You need thio survive

01:34

Well the number of snails available has plummeted in response

01:36

prices double right Demand is the same and supply is

01:40

down so prices go up What used to cost eight

01:42

bucks a pound now cost sixteen bucks a pound And

01:45

instead of four hundred dollars well this month your snail

01:47

fix will cost you eight hundred It cuts into your

01:50

other spending You usedto have eleven hundred dollars for everything

01:53

else Now you've got just seven hundred You'll have to

01:56

cut back on your non snail expenditures Yeah Sorry Real

02:00

balance effect at work here people Basically if prices go

02:03

up and income remains the same consumption expenditures after decline

02:06

You just can't buy as much with the money you

02:09

have All right well you'll have to economize this month

02:12

on ly streaming movies replay old video games brass grills

02:15

for the time being for your teeth there At least

02:17

until they ramp up those experimental snail farms You know

02:20

where Find a cure for snail Ebola Let's just hope 00:02:23.7 --> [endTime] it stays with the snails eh

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