Economics is said to be closely related to psychology. When people get scared about the state of their personal finances, they decrease their spending. When they feel confident, they spend more. In a four-paragraphs essay (400 words) discuss how much of an effect do you think this phenomenon has on the economy as a whole.

The correct answer to this open question is the following.

When people get scared about the state of their personal finances, they decrease their spending. When they feel confident, they spend more. This phenomenon has impacted the economy as a whole because human behavior directly affects most of the daily aspects of our society.

It is understandable to say that when people are in fear about the future, one of the first things they do is try to protect themselves. And personal finances is one of the key aspects where people feel more vulnerable. So they stop spending until they see changes in the economy.

Sometimes, the economic threat can be true or a matter of speculation. In this case, the economy is affected in that although there is no real threat just speculation, people believe what they see or read in the news. People tend to overreact in panic and they decide to stop buying. When this happens, stores and companies also stop to receive money. So these companies cannot buy goods to be sold. This means that with no income, it is going to be difficult to pay employees. It is a vicious cycle.

On the other hand, when people feel confident that the economy of the country is solid, we have the opposite effect. People get out and buy things. Many times not only to satisfy basic necessities but they buy unnecessary things too.

It is a time when all kinds of goods can be sold. From houses to cars, furniture, electronics, as well as entertainment services o trips. When consumers are willing and able to spend their hard-earn money, companies are happy because they can sell more, buy more goods. Fabrics buy more raw materials to produce more products.

When the economy is rolling, Corporations think on invest more. They consider open new fabrics, stores, restaurants, and franchises. This immediately activates the national economy, and everybody is happy.

But as history has taught us, we have to be very careful because, in a free-market economy like the one that exists in the United States, the economy passes through a series of cycles. And when a cycle ends, we have to be aware of what is going to happen.

One example could be what happened during the "Roaring 1920s," when people spend a lot of money buying on credit. Everybody was so happy until the US stock market crashed on October 29, 1929, in what is considered the beginning of the Great Depression.