What are some reasons why household wealth might fluctuate even if current income is unaffected? Give...

What are some reasons why household wealth might fluctuate even if current income is unaffected? Give some examples of how households hold wealth.

How would fluctuations in household wealth affect household spending and hence AD?

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Expert Solution

Household wealth might increase or decrease even though current income may be constant. This is beacuse of various factors which contribute to the estimation of household wealth. Factors such as Sale/ purchase of property, fire in the house/ godown, lottery, hospitalization with no health policy, purchase/ sale of gold etc. are few of the factors that may be one off incidents but can decrease/ increase the household wealth drastrically. Thus, households hold wealth in terms of property, gold, bonds etc.

Household spending will more or less remain the same with change in household wealth. This is beacuse consumption (major portion in household spending) remains mostly the same even when wealth decreases or increases (keeping current income constant). Even if the consumer faces a shock and his/her household wealth decreases drastically, they may take a loan in order to maintain the same level of consumption. This Aggregate Demand (AD) curve will not shift.

Rahul Sunny answered 1 year ago

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