ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value.

Detailed explanation-2: -The “wealth effect” is the notion that when households become richer as a result of a rise in asset values, such as corporate stock prices or home values, they spend more and stimulate the broader economy.

Detailed explanation-3: -The wealth effect is a theory centered around the idea that when equity portfolios are consistently earning, the owners feel secure in their wealth and are more likely to spend. Rising equity portfolios are caused by an accelerated increase in stock prices.

Detailed explanation-4: -Rising household wealth tends to push the household saving ratio down and falling household wealth lifts the saving ratio (see chart below).