Real Balance Effect
Categories: Accounting
Riding a unicycle on a tightrope. Walking home from a raucous New Year's Eve party. Examples of one kind of, um…real balance effect.
Another kind relates to economic decisions.
The real balance effect has to do with the purchasing power of money. It posits that a change in price levels alters how much stuff you can buy...that is, assuming your income remains the same. You make $4,000 a month. Take out taxes and rent and utilities and insurance and all the other basic stuff that eats away at your disposable income. Now you have $1,500 in cash to spend each month.
But you still have to eat. Because of a rare gastrointestinal disorder, you have to eat special snails with every meal. There's a certain enzyme that your body can't produce that can only come from this particular natural snail meat. Eat them...or you'll die. So, snail smoothies for breakfast. Snail sandwiches for lunch. Snail a la king for dinner. And for a late-night snack: deep fried snail poppers.
The snails you need are usually $8 a pound. In a typical month, you spend about $400 on them. Which leaves you $1,100 out of your budget for other stuff. Money to go to the movies or buy video games or purchase gold grills for your teeth. Whatever else you need.
But this month, you get bad news. There's been an outbreak of a rare snail ebola that has ravaged the population of the special snails you need. The number of snails available has plummeted. In response, prices double. What used to cost $8 a pound now costs $16 a pound. Instead of $400, this month your snail fix will cost $800.
It cuts into your other spending. You used to have $1,100 for everything else. Now, you've just got $700. You'll have to cut back on your non-snail expenditures.
Real balance effect at work. Basically, if prices go up and income remains the same, consumption expenditures have to decline. You just can't buy as much with the money you have.
You'll have to economize this month. Only streaming movies. Replay old video games. Brass grills for the time being. At least until they ramp up those experimental snail farms...or find a cure for snail ebola.
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Econ: What is the Real Balance Effect?0 Views
And finance Allah shmoop What is the rial balance effect
Riding a unit cycle on a tightrope walking home from
a raucous New Year's Eve party Examples of one kind
of real balance of that Yeah well another kind relates
to economic decisions Well the real battle Its effect has
to do with the purchasing power of money It posits
that a change in price levels alters how much stuff
you can buy that is assuming your income remains the
same while you make four grand a month Take out
taxes and rent and utilities and insurance and all the
other basic stuff that eats away at your disposable income
Now you have fifteen hundred dollars left in cash to
you know spend on stuff each month but you still
have to eat You know because of a rare gastro
intestinal disorder you have to eat special snails with every
meal There's a certain enzyme that your body can't produce
That only comes from this particular natural snail meat Yes
eat them or die So snail smoothies for breakfast Snail
sandwiches for lunch Snail ala King for dinner and for
a late night snack Deep fried snail poppers Well the
snails you need are usually eight bucks a pound In
a typical month you spend about four hundred dollars on
them which leaves you eleven hundred dollars out of your
budget for you know stuff money Teo You know go
to the movies or buy video games or purchase gold
grills for your teeth Like Ryan locked Yeah whatever else
you need but this month you get bad news There's
been an outbreak of rare snail Ebola that has ravaged
the population of the special snails You need thio survive
Well the number of snails available has plummeted in response
prices double right Demand is the same and supply is
down so prices go up What used to cost eight
bucks a pound now cost sixteen bucks a pound And
instead of four hundred dollars well this month your snail
fix will cost you eight hundred It cuts into your
other spending You usedto have eleven hundred dollars for everything
else Now you've got just seven hundred You'll have to
cut back on your non snail expenditures Yeah Sorry Real
balance effect at work here people Basically if prices go
up and income remains the same consumption expenditures after decline
You just can't buy as much with the money you
have All right well you'll have to economize this month
on ly streaming movies replay old video games brass grills
for the time being for your teeth there At least
until they ramp up those experimental snail farms You know
where Find a cure for snail Ebola Let's just hope 00:02:23.7 --> [endTime] it stays with the snails eh