An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, ceteris paribus.

Question

BlackTom AI · Accepted Answer

An increase in stock prices increases the market value of households' financial assets, so it typically increases their willingness to spend.

1) Relevant knowledge points and concepts
- Wealth effect: When asset prices (stocks, housing) rise, measured wealth rises; wealthier households tend to consume more, holding other factors constant (ceteris paribus).
- Marginal propensity to consume (MPC) from wealth: a fraction of an increase in wealth that is spent on consumption.
- Ceteris paribus means other determinants of spending (income, interest rates, expectations) are held constant.

2) Step-by-step reasoning
- Step 1: Stock prices rise → the dollar value of households' stock holdings increases.
- Step 2: Measured wealth of those households increases (higher net worth).
- Step 3: With higher wealth and unchanged other conditions, households feel financially better off and are likely to raise consumption expenditures.
- Step 4: Therefore the increase in stock prices both increases wealth and may increase willingness to spend.

3) Example calculation (intermediate steps shown)
- Suppose a household has $100,000 in stocks. A 20% rise in prices raises that holding to $120,000, an increase of $20,000.
- If the household's MPC out of wealth is 0.05, additional consumption = 0.05 × $20,000 = $1,000.
- So consumption increases as a direct effect of higher stock values.

4) Why the correct answer is correct
- The first blank must be “increases” because stock-price appreciation raises the size of people’s wealth. The second blank must be “increase” because, ceteris paribus, higher wealth tends to raise willingness to spend (positive wealth effect).

5) Why the other options are incorrect
- b. “decreases; increase”: incorrect because stock-price increases do not decrease wealth.
- c. “increases; decrease”: incorrect because increased wealth usually raises, not lowers, willingness to spend.
- d. “decreases; decrease”: incorrect on both counts for the same reasons.

Conclusion: The correct choice is a. increases; increase, which matches the provided answer.

An increase in stock prices the size of people's wealth and may their willingness to spend, ceteris paribus.Single choice

Similar Questions

According to Table 1 below, what is the average total cost when output per day is 21?

Floating exchange rates are determined by

According to the video, who is most important in determining how resources are allocated in a market system?

If the price of cinema tickets rises, and fewer people go to the cinema, this is an example of:

Why does money flow from households to firms?

Economics is the study of how society manages its

Expansionary fiscal policy in an open economy with a floating exchange rate will likely:

Contractionary monetary policy in an open economy with a floating exchange rate will likely:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler

An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, ceteris paribus.Single choice