Real Wealth Effect
Definition
The real wealth effect refers to the change in consumer spending that occurs as a result of changes in the value of assets, such as stocks or housing. When the value of these assets increases, people feel wealthier and tend to spend more.
Analogy
Imagine you have a piggy bank where you save your money. One day, you find out that the value of your piggy bank has doubled! You suddenly feel richer and decide to go on a shopping spree, buying things you wouldn't have bought before.
Related terms
Aggregate Demand: The total demand for goods and services in an economy at a given price level.
Consumer Confidence: The degree of optimism or pessimism consumers feel about their financial situation and the overall state of the economy.
Asset Bubble: A situation where the prices of certain assets rise rapidly due to speculation rather than their intrinsic value.
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