the wealth effect is a psychological phenomenon that causes people to spend more as the value of their asset rises. the premise is that when consumers' homes or investment portfolios increase in value, they feel more financially secure, so they increase their spending. conversely, when consumers see the value of their homes or portfolios fall, they tend to spend less. the wealth effect attempts to explain why consumers might change their spending habits even if their income and fixed costs have stayed the same. analysts disagree over whether the wealth effect really exists. proponents say a $1 increase in wealth can increase spending by $0.2-0.8. critics say that if there is a wealth effect, the percentage change consumers experience in their wealth results in a smaller change in their spending habits, which wouldn't have a meaningful effect on the economy. critics also say that changes in employment rates, tax rates and household expenses, not changes in wealth, have the biggest effect on consumer spending. here is an example of how the wealth effect works. ? purchased a house for $300,000 in 2007. she earned a $100,000 salary and her average expenses including housing were $75,000 per year. in 2008, the great recession lowers her home's value to $260,000. ?'s income was still $100,000 and her expenses were still $75,000. but she cut back on her variable expenses because she was concerned about ? home equity. she ? spending $60,000 a year instead of $75,000. in 2013, when her home's value rebounded and grew to $320,000, ? felt more secure as her home equity increased. while her income was still $100,000 adjusted for inflation, she increased to spending to $850,000 because of a new ? sense of wealth.
- wealth effect・・・資産効果
- cut back on・・・～を切り詰める