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 were 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 are more likely to experience sudden losses in their wealth and may reduce their consumption to compensate for the loss. Option A does suggest a connection between the stock market price level and the consumption, but it does not give any information about who owns the stocks, making it less relevant. Option B and C suggest that the stocks are owned by institutional investors, who are less likely to significantly decrease their consumption due to the stock market crash.

The Stock Market Just Crashed;the Dow Jones Industrial Average Fell