A sharp rise in the real value of stock prices, which is independent of a change in the price level, would best be an example of:
A) The interest-rate effect
B) The real-balances effect
C) A change in the degree of excess capacity
D) A change in real value of consumer wealth

Question

Quizplus · Accepted Answer

A sharp rise in the real value of stock prices would increase the real value of consumer wealth, as investors who own stocks would have larger portfolios and feel wealthier. This increase in wealth would lead to consumers spending more, which would increase aggregate demand and output. Additionally, the increase in stock prices would also encourage businesses to invest more, as they would have an easier time raising capital through stock issuance. This increase in investment would also stimulate aggregate demand and output. As such, the correct answer is D, a change in real value of consumer wealth.

A Sharp Rise in the Real Value of Stock Prices