Final answer:
The wealth effect describes how changes in asset prices influence household wealth and spending habits, impacting aggregate demand. Consumer optimism and access to credit also affect these spending decisions.
Step-by-step explanation:
The tendency of changes in asset prices to affect households' wealth and thus their spending on consumption goods is known as the wealth effect. This economic phenomenon suggests that as asset prices rise, households feel wealthier and are more likely to increase consumption, which in turn affects the overall aggregate demand. Conversely, when asset prices fall, households may feel less wealthy and reduce their consumption, leading to a decline in aggregate demand. Factors such as expected future income also play a crucial role; optimistic expectations can lead to increased spending, whereas pessimism can result in reduced consumption. Moreover, changes in wealth or credit availability can influence a household's decision to spend or save, with access to credit potentially enabling spending beyond current income levels.