Question

In: Economics

​Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to


Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to 

 decrease consumption, which shifts aggregate supply left

 decrease consumption, which shifts aggregate demand left

 decrease consumption, which shifts aggregate supply right

 decrease consumption, which shifts aggregate demand right

Solutions

Expert Solution

The wealth effect is the phenomenon in which an increase in the value of people's wealth(financial or physical) induces their consumption and vice versa. In the question, when the stock market crashes, people feel less wealthy (or that their wealth has reduced) and hence try to reduce or bring down their level of consumption. Thus, at the aggregate level, overall consumption in the economy decreases and thus aggregate demand decreases. A decrease in aggregate demand shifts the aggregate demand curve towards left/below.

Ans: option 2. decrease consumption, which shift aggregate demand left

Rahul Sunny answered 2 years ago
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