“The wealth effect is the extent to which consumer spending is goosed upward due to increases in stock prices. Of course it exists, but to what extent? I made a speech a while back in which I said that the wealth effect is greater than economists believe. I still say this.” – If people believe that their house and investments are going up in value, they will be more willing to spend more, which is good for the economy. However, if they believe that their house and investments are going down in value, they will stop buying things, which is bad for the economy. This is the wealth effect.
