CFA Practice Question

CFA Practice Question

Which of the following will increase aggregate demand?

I. Higher prices in the stock market
II. Higher prices in the real estate market
III. Higher real wealth
A. II and III since stocks are not real wealth
C. None of these factors will increase aggregate demand; they will increase the quantity of aggregate demand but not the aggregate demand itself.
Explanation: Increases in stock and housing prices increase the real wealth of households and thus increases aggregate demand.

User Contributed Comments 11

User Comment
jwp2 How can you say increases nominal stock and housing prices increases real wealth?
jason jwp2:
On page 245 of the textbook, it reads that "Stock prices in the US increased by more than 25 percent in the preiod 1995 to 1998. This stock market boom increased the real wealth of stockholders. In contrast, both stock prices and housing prices declined....
mm04 Anyone can help here? What is the "In contrast..." from Jason's quote?
Levon It is on page 225 and the crux of it is that changes in stock prices as well as housing/real estate prices affect real wealth. I may not agree, but that is what CFAI's book says.
stefdunk think about if from a keynesian point of view. when you sell your house/stock you have more money. because you have more money, you spend more money. (but if you, ahem, forget, to spend your accumulated paper wealth...)
scotty21 The Wealth effect - when asset prices rise (stocks and real estate), people feel wealthier and so they spend more, thus increasing aggregate demand
escempep I can see on my notes that the demand shifts in the following situations :
- change in expectations about economy and/or inflation
- change in fiscal and/or monetary policy
- change in foreigner's income and/or exchange rates

I do not see anything about household's wealth ...
ninad123 Monetary policy of cutting taxes increases real wealth of individual increasing his spending and AD, but since it is clubbed with all wrong options like I and II you are forced to choose C
Andy552 technically speaking, its only increases in real wealth that increases AD. The question doesn't state that the increases in stocks and real estate are real, or more than the rate of inflation.
lonepine from an aggregate demand perspective, i would think higher asset prices would correspond to a relatively lower debt burden (i.e. monetization of debt), thus AD would go up as the real burden of debt goes down. of course dislocations exist, but that's for academic economists to sort out
abeeman924 scotty21 is exactly right. We saw the wealth effect in action with the tech bubble in the late '90's and the housing bubble last decade.
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