The wealth effect was very strong during the stock market and housing booms of the late 1990s when the personal savings rate went negative as households consumed more than their income. This effect has sense reversed itself due to the recent credit crisis.

Question

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The wealth effect refers to the change in spending that accompanies changes in perceived wealth. During the late 1990s, the stock market and housing booms increased individuals' wealth, leading to increased spending and a negative personal savings rate. The recent credit crisis diminished wealth, reversing this effect as individuals became more cautious with their spending and savings.

The Wealth Effect Was Very Strong During the Stock Market