The stock market just crashed; the Dow Jones Industrial Average fell by 750 points.You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?
A)The crash had been preceded by a large run-up in the price of stocks.
B)Most stocks were owned by insurance companies.
C)Most stocks were owned by pension funds that invested in the market.
D)Many individuals had invested in the stock market immediately prior to the crash.

Question

Quizplus · Accepted Answer

If many individuals had invested in the stock market immediately prior to the crash, they may have suffered losses and reduced their consumption in response. This would be a direct and immediate effect on aggregate consumption. In contrast, choices A, B, and C do not necessarily provide direct channels through which the stock market crash affects aggregate consumption. Preceding run-ups in stock prices could affect consumption indirectly through wealth effects or confidence effects, depending on the reasons for the run-up and the timing of the crash. The ownership structure of stocks by insurance companies or pension funds does not necessarily affect the behavior of individual consumers, and these institutional investors may have different objectives and time horizons than households.

The Stock Market Just Crashed; the Dow Jones Industrial Average