Which type of spending does the real balances effect primarily work?

The real balances effect primarily works through changes in consumer spending in response to alterations in the real value of money balances. When the price level decreases, the real value of cash holdings increases, leading consumers to feel wealthier and encouraging them to spend more. Conversely, if the price level rises, the real value of money balances falls, causing consumers to feel poorer and potentially reduce their spending. This effect is particularly significant in the context of the aggregate demand curve, influencing overall economic activity.