Suppose a fall in stock prices makes people feel poorer. What are the effects of this decrease in wealth?
A)a decrease in consumption, shown as a movement to the left along a given aggregate demand curve
B)an increase in consumption, shown as a movement to the right along a given aggregate demand curve
C)a decrease in consumption, which shifts the aggregate demand curve to the left
D)an increase in consumption, which shifts the aggregate demand curve to the right

Question

Quizplus · Accepted Answer

A fall in stock prices and the resulting decrease in wealth will lead to a decrease in consumption as people feel poorer and are likely to spend less. This decrease in consumption will lead to a shift of the aggregate demand curve to the left, indicating lower overall demand in the economy. Option A is incorrect because it mistakenly suggests that the fall in consumption would result in a movement along a given aggregate demand curve, when in fact, it would lead to a shift of the entire curve. Option B is also incorrect because it suggests an increase in consumption, which is not consistent with the scenario described. Option D is inaccurate because an increase in consumption would require a corresponding increase in wealth, which is not present in this case.

Suppose a Fall in Stock Prices Makes People Feel Poorer