Which economic concept explains increased spending due to the perception of increased wealth?

The Wealth Effect explains the phenomenon where individuals feel wealthier due to the rise in the value of their assets, such as homes or stock investments. When people perceive an increase in their wealth, they are more likely to increase their consumption and spending. This is because they associate greater perceived wealth with a better financial position, leading to a boost in consumer confidence and resulting spending.

For example, if the stock market is performing well and individuals see the value of their investments rising, they may feel more secure about their financial situation. This sense of security can lead them to spend more on non-essential goods and services, stimulating economic growth. Essentially, the relationship between perceived wealth and spending is central to understanding consumer behavior in the economy.

While income redistribution focuses on how the distribution of income affects consumption and savings, and consumer sentiment deals with overall feelings about the economy, neither specifically captures the response to perceived changes in wealth. Marginal utility pertains to the additional satisfaction gained from consuming one more unit of a good or service but does not directly relate to perceptions of wealth.