If consumers enjoy an increase in wealth due to stock market gains,which of the following combinations of events will mostly likely take place?
A) A downward shift of the aggregate expenditure line and a rightward shift of the AD curve
B) A downward shift of the aggregate expenditure line and a rightward shift of the AD curve.
C) An upward shift of the aggregate expenditure line and a leftward shift of the AD curve.
D) An upward shift of the aggregate expenditure line and a rightward shift of the AD curve.
E) An upward shift of the aggregate expenditure line and no shift in the AD curve.

Question

Quizplus · Accepted Answer

An increase in wealth due to stock market gains will lead to a higher level of consumption spending as consumers will feel wealthier and more confident. This will result in an upward shift of the aggregate expenditure line. At the same time, the increase in consumption spending will result in a rightward shift of the AD curve, as a higher level of aggregate demand is now being generated at every price level. Therefore, the combination of an upward shift of the aggregate expenditure line and a rightward shift of the AD curve is most likely to take place.

If Consumers Enjoy an Increase in Wealth Due to Stock