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REAL-BALANCE EFFECT: A change in aggregate expenditures on real production made by the household, business, government, and foreign sectors that results because a change in the price level alters the purchasing power of money. This is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are interest-rate effect and net-export effect.

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Lesson 19: Monopolistic Competition | Unit 4: Analysis Page: 16 of 22

Topic: Efficiency And Excess Capacity <=PAGE BACK | PAGE NEXT=>

  • The market control of monopolistic competition firms has two important implications:

  • First, resources are not used efficiently.
  • Second, as previously noted, firms have excess capacity.

    • Efficiency: Resources are used efficiently when price is equal to marginal cost.

    • Excess Capacity: In the long run, efficient use of capital is achieved at the minimum efficient scale.


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INTEREST-RATE EFFECT

A change in aggregate expenditures on real production, especially those made by the household and business sectors, that results because a change in the price level alters the interest rate which then affects the cost of borrowing. This is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are real-balance effect and net-export effect.

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