The Impact of Stock Price Increase on Real Wealth

B

As the real wealth of households increases, people demand more goods and services. This causes the entire aggregate demand curve to shift to the right.

The correct answer to the question is:

B. The aggregate demand curve will shift to the right.

Explanation:

When there is a broad increase in the price of stocks, it typically indicates that the overall value of stocks has increased, which means that individuals who own stocks experience an increase in their real wealth. Real wealth refers to the purchasing power of individuals' assets and income after adjusting for inflation.

When individuals' real wealth increases, it tends to positively impact their overall economic well-being and confidence. This increase in wealth can lead to higher consumer spending, as individuals feel more financially secure and may be more willing to make discretionary purchases. Higher consumer spending, in turn, leads to an increase in aggregate demand.

Aggregate demand refers to the total amount of goods and services demanded by all sectors of the economy at a given price level over a specific period. It is represented by the aggregate demand curve, which shows the relationship between the price level and the quantity of goods and services demanded.

An increase in aggregate demand is represented by a rightward shift of the aggregate demand curve. This shift indicates that, at any given price level, the quantity of goods and services demanded by all sectors of the economy has increased. It suggests that individuals and businesses are willing to spend more on goods and services, reflecting a higher level of economic activity.

Option A is incorrect because a rightward shift of the aggregate demand curve implies an increase, not a decrease, in aggregate demand. Therefore, the aggregate demand curve will not shift to the left in this scenario.

Option C is incorrect because an increase in the real wealth of individuals, resulting from a broad increase in the price of stocks, is likely to contribute to an increase in consumer spending and aggregate demand. It would not cause a fall in the general price level.

Option D is incorrect because the question is focused on the effect of an increase in the real wealth of individuals on the aggregate demand curve, rather than the aggregate quantity demanded. While an increase in real wealth may lead to an increase in aggregate quantity demanded, this answer choice does not fully capture the relationship between real wealth and aggregate demand.

In conclusion, when there is a broad increase in the price of stocks, leading to an increase in the real wealth of individuals, the aggregate demand curve will shift to the right as individuals' increased purchasing power stimulates higher consumer spending and overall economic activity.