Explain how a stock market crash has the potential to lead to a recession in an economy
What will be an ideal response?
A stock market crash is essentially a substantial decrease in the average price of stocks. Stocks are a part of real wealth. A stock market crash decreases the value of stocks which decreases real wealth. Real wealth is an important determinant of consumption spending. If real wealth declines, so does consumption spending. Therefore, a stock market crash will result in a decline in consumer expenditures. This will result in a decline in GDP. If the decrease in GDP is substantial enough, this can lead to a recession.
You might also like to view...
Which of the following examples best describes the Law of Supply?
A) When the cost of production of cotton increased, all suppliers' willingness to accept decreased. B) When the market price of pens increased, sellers started supplying more pens. C) When the cost of production of cotton fell, the market price of cotton also fell. D) When the market price of pens increased, sellers started supplying fewer pens.
The figure above shows the U.S. demand and U.S. supply curves for cherries. At a world price of $2 per pound once international trade occurs, the total exports of cherries from the United States to other nations equals
A) 200,000 pounds. B) 400,000 pounds. C) 600,000 pounds. D) 800,000 pounds. E) 0 pounds.