What is the wealth effect?
A)The effect of a change of wealth on consumption.
B)The effect of a change of wealth on savings.
C)Total consumer wealth divided by income.
D)The effect of a change in income on wealth.

Question

Quizplus · Accepted Answer

The wealth effect refers to the impact that a change in an individual's or a household's wealth has on their consumption patterns. For example, if an individual's wealth increases (e.g. due to a rise in the value of their house or stocks), they may feel more confident and spend more, leading to an increase in overall consumption. Conversely, if an individual's wealth decreases (e.g. due to a stock market crash), they may feel less confident and reduce their spending, leading to a decrease in overall consumption. Therefore, the wealth effect is the effect of a change in wealth on consumption.

What Is the Wealth Effect