Suppose a housing bubble inflates house prices to new records. What will happen to overall consumption in this economy?
A) It will decrease.
B) It will stay the same.
C) It will increase.
D) The impact on consumption is unclear.

Question

Quizplus · Accepted Answer

When house prices increase, homeowners feel wealthier, which can lead to increased spending due to the wealth effect. This phenomenon, where higher asset values (in this case, housing) boost consumer confidence and spending, is known as the wealth effect.

Suppose a Housing Bubble Inflates House Prices to New Records