In the Great Recession of 2007-2009, stock market values shrank, causing a reverse
A) wealth effect.
B) real-balances effect.
C) interest-rate effect.
D) expectations effect.

Question

Quizplus · Accepted Answer

The wealth effect refers to the fact that when the value of stocks and other assets go up, consumers feel wealthier and are more likely to spend money, boosting economic activity. When stock market values shrank during the Great Recession, the opposite occurred, causing a reverse wealth effect where consumers felt poorer and spent less, further exacerbating the economic downturn.

In the Great Recession of 2007-2009, Stock Market Values Shrank