What is the "wealth effect" in economics?
A. The idea that poor people save more money
B. When people spend less because of inflation
C. When rising asset values make people feel richer and spend more
D. A sudden rise in food prices due to war
Answer (2)
The correct answer is: C. When rising asset values make people feel richer and spend more.The wealth effect refers to the tendency of people to spend more when the value of their assets (like homes, stocks, or investments) increases. Even if their income hasn't changed, they feel wealthier and are more confident about their financial future, which leads to higher consumer spending. This can stimulate economic growth.
The correct answer is letter C. When rising asset values make people feel richer and spend moreThe wealth effect happens when people feel richer because their house or stock values go up. As a result, they feel more confident to spend money—even if their income hasn't changed. This can help the economy grow. However, if asset prices fall (like during the 2008 crash), the opposite happens. In the Philippines, many families feel wealthier when their house or land increases in value, and they may buy new appliances or renovate. But if the value drops, they cut back on spending.
