|It's Supposed to be a Two-Edged Sword|
|Topic||Aggregate Demand/Aggregate Supply|
|Key Words||Wealth Effect, Disposable Income, Interest Rates, Consumption|
Consumer expenditures account for two-thirds of total spending. Among
the factors that affect consumer spending are personal income, expectations,
price levels, credit availability and wealth. The "wealth effect"
describes the change in consumption resulting from a change in wealth.
When stock prices were rising, economists attributed a portion of the
increase in consumption to the wealth effect. Now that stock prices have
fallen, economists are wondering why the decrease in wealth has not significantly
reduced consumer spending.
(Updated September 1, 2002)
|Source||Bernard Wysocki Jr., "Forget the Wealth Effect: Income Drives Consuemr Spending," The Wall Street Journal, August 12, 2002.|
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