IS/LM Model

and finance Allah shmoop What is the wealth effect All

right people when your stock portfolio is climbing like that

little mountain climber guy on the price is right you

just might feel like yodeling for joy Or maybe you

just dance a little either way that happy feeling is

caused by the wealth effect with wealth Effect is in

economic theory which states that people spending habits correlate with

the ups and downs of their unrealized well like stocks

and investments in real estate In you know owning your

own home When your stocks are on the upswing you

might find yourself spending thanks to a newfound economic confidence

a new appliance here you know a new TV there

Yamagata It also means that when economic doom and gloom

arise from the ashes of ah burst housing bubble for

example causing your house's value to tumble down words well

then you'LL start spending less Maybe you'LL start eating at

home for lunch more often and maybe we'LL postpone that

trip Teo Tasmania wherever people go in an aggregate sense

the wealth effect suggests that consumers are spend happy during

bull markets and that they go into defense of savings

mode during bear markets right kind of makes sense Well

Wealth of act might affect us mere mortals but it

wouldn't affect *** economicas The theoretical perfectly rational economic agent

Po Mo Economicas would see that because this wealth is

yet to be realized it's no reason to change spending

habits Stock prices that went might fall again before you

cash them in and it's likely that the housing bubble

won't keep housing prices down forever Yet we real humans

with our monkey brains can't help feel the excitement that

comes with rising investments in the fear that comes with

falling investments Of course if an investor was living off

of well his or her dividends while those dividends would

be the source of their income right the cash the

Levant which is more of an income effect thing than

a wealth effect thing Either way the wealth effect is

wound Just a theory some economists point to It is

a way to explain some peculiar economic event For instance

a ten percent tax increase in the late nineteen sixties

did not stop consumers from spending like it was payday

every day grabbing That's a stock portfolio bull by the

horns while politicians and economists like we're baffled and they

ruffled Well that's not how this was supposed to go

another economist shout here say calling the wealth effect a

bunch of hooey Like a bad theory it doesn't mean

anything They say that the wealth effect is upside down

That increased spending probably leads to asset or investment appreciation

not vice versa Still other economists say that even if

the wealth effect is a really thing well it has

such a teeny tiny effect on the economy That is

kind of a moot point in the aggregate To spend

or not to spend That is the question to check

your portfolio or not That is another question Well what

would *** economicas dio Yeah let's do what he does