The key with financial wealth is that it can be used to acquire physical wealth. In financial lingo, financial wealth tends to be liquid, it can easily flow between assets. Corporate stock, government savings bonds, and money market bank accounts can all easily flow into money. This money can then flow into, or be used to buy, corporate stock, government savings bonds, and money market bank accounts.

Or, more importantly for this present discussion, this financial wealth can flow into, or be used to buy, physical wealth, including houses, cars, buildings, land, property, equipment, furniture, appliances, and the whole array of tangible goods. That is, the financial wealth can be used for aggregate expenditures, especially consumption expenditures and investment expenditures.

Changes in financial wealth, as such, tend to cause consumption expenditures and investment expenditures to change in the same direction.

• If the household sector and business sector have more financial wealth, then they have the ability to buy more goods.


• If the household sector and business sector have less financial wealth, then they do not have the ability to buy as many goods.

What It Does

Financial Wealth

More Financial Wealth

To see how an increase in financial wealth affects the aggregate expenditures line, click the [More Wealth] button. The increase in financial wealth triggers an increase in aggregate expenditures, which is a upward shift of the aggregate expenditures line.

Less financial Wealth

To see how a decrease in financial wealth affects the aggregate expenditures line, click the [Less Wealth] button. The decrease in financial wealth triggers a decrease in aggregate expenditures, which is a downward shift of the aggregate expenditures line.

What Does It Mean?

• Monetary Policy: An important component of financial wealth is money. The total supply of money in the economy is controlled through monetary policy by the Federal Reserve System for the expressed purpose of addressing the problems of business-cycle instability. A key to this monetary policy control is that financial wealth affects aggregate expenditures. Expansionary monetary policy increases the money supply, which adds to financial wealth and consequently increases aggregate expenditures. Contractionary monetary policy decreases the money supply, which reduces financial wealth and consequently decreases aggregate expenditures.


• Stock Market: The stock market, and related financial markets, are the primary source of financial wealth for the economy. When stock prices rise, then the financial wealth of stock holders also increases. The result is an increase in aggregate expenditures. Alternatively, when stock prices fall, financial wealth also decreases, and so too do aggregate expenditures.