Why does an increase in the price level lead to the real-balances effect?

An increase in the price level reduces the purchasing power of money, meaning that consumers can buy fewer goods and services with the same amount of money. This decline in real wealth can lead to decreased consumer spending, as individuals feel poorer. Consequently, the aggregate demand for goods and services decreases, illustrating the real-balances effect, where higher price levels result in lower real balances and reduced consumption.