A declining stock market index due to lower share prices
A) reduces people's wealth and as a result may reduce their willingness to spend.
B) increases people's wealth and as a result may increase their willingness to spend.
C) decreases the amount of funds that business firms can raise by selling newly issued stock.
D) both A and C of the above.
E) both B and C of the above.

Question

Quizplus · Accepted Answer

When the stock market index declines, the share prices decrease which can result in a reduction in people's wealth. This reduction in wealth may, in turn, reduce their willingness to spend. Additionally, since the stock market is a source of funding for business firms through the sale of newly issued stock, a decline in the market may reduce the amount of funds that firms can raise. Therefore, options A and C are both correct. Option B is incorrect as a declining stock market index does not increase people's wealth.

A Declining Stock Market Index Due to Lower Share Prices