The magnitude of the wealth effect is not known precisely. One study estimates the wealth effect at 3 cents per dollar. This translates into only a 30 percent reduction in the growth of consumer spending if the wealth effect were to end. In other words, as employment and income appear to be the primary determinants of consumer spending, low unemployment and growing wages should be enough to keep us out of a recession. Not everyone believes that the wealth effect is dead.
Home prices are high and increasing in some areas of the country.
Even with the recent plunge in stock values, investors still have substantial capital gains that could fuel spending. Consumer spending will decline, the economy will slow and although the decreased growth might feel like a recession, it won't be. Describe how it affects aggregate demand. What happens to aggregate demand when there is a significant decrease in individual wealth. Suppose that unemployment increases.