Suppose a stock market crash makes people feel less wealthy. What are the effects of this decrease in wealth?
A) a decrease in consumption, which shifts aggregate supply left
B) a decrease in consumption, which shifts aggregate demand left
C) an increase in consumption, which shifts aggregate supply right
D) an increase in consumption, which shifts aggregate demand right

Question

Quizplus · Accepted Answer

A decrease in wealth leads to a decrease in consumption, which in turn shifts aggregate demand leftward. This is because a decrease in wealth makes individuals feel poorer, thus reducing their ability and willingness to spend on goods and services. As a result, businesses producing these goods and services will experience a decrease in demand and cut back on their production levels, leading to a leftward shift in aggregate demand.

Suppose a Stock Market Crash Makes People Feel Less Wealthy