Question

How are the wealth effect and the household liquidity effect similar? How are they different?

Short answer

The cost of assets decreases as rates go up, and as a result, consumers cut back on their purchasing and household spending. When asset values were weak, the distinction between the two consequences is how they were spent.

Step-by-step solution

Concept Introduction.

The wealth effect states this because when sales increase, consumers would purchase more on property investment and stocks because rising costs give them more confidence in existing income. The impact of price fluctuations on discretionary income on householders is explained by the domestic liquidity impact.

Explanation of solution.

The cost of assets decreases as rates go up, and as a result, consumers cut back on their purchasing and household spending.

When asset values were weak, the distinction between the two consequences is how they spent. Consumers reduce overall spending on property and they're less ready to spend on lesser value, but they replace low cash assets for further liquid assets when it comes to residential liquidity expenditures. Decreasing asset prices lead to greater spending on liquid assets rather than dwellings, resulting in weaker aggregate demand.