The Wealth Effect

Wealth effect: The wealth effect is a determinant of demand as well as aggregate demand. Wealth is the accumulation of a person’s assets (i.e cars, homes, property, boats, gold, stocks, bonds).

If prices on these asset items go up or price levels across the entire market go up then the value of these assets will increase, or rather their assets will appreciate. People that possess assets will feel more wealthy because their assets have appreciated. When people feel wealthier then they will buy more of everything. That means their personal consumption will increase, which directly increases aggregate demand. Thus, the aggregate demand curve with shift to the right.