Executive summery:
The All Ordinaries Index (XAO) is an index on the Australian Stock Exchange that acts as the market indicator for Australia's share market. Its recent movement suggests a large increase in stock prices of 30% over a short period of time. This has many potential affects on the economy including and increase consumer confidence, the wealth effect increased investment and hence an increase in the level of output. This will have a multiplied affect on the economy by increasing exogenous expenditure and the MPC. This could potentially have an expansionary effect on the economy bringing about full employment and potential inflation. This expansionary gap may prove to be problematic to policy-makers as inflationary pressures rise making it necessary to adopt contractionary macroeconomic policy. However, some may question policy change due to a change in stock prices, as it is such a small segment of the economy.

Stock prices refer to the market value of a share or asset. A rise in stock prices will have an indirect affect on the economy through investor and consumer confidence, the wealth effect and the ‘market value Approach’ creating an output gap. This output gap could potentially affect inflation and employment. Although Macroeconomic policy is not used to target asset prices, it may become necessary due to inflationary pressures.

Stoke prices are commonly stated by economist to be ‘macroeconomic indicators’ and thus a rise in stock prices commonly reflect improved investor confidence and a stronger macroeconomic environment. Therefore a rise in the All Ords in a time of such a recession will generally bring about stronger consumer confidence as people start to believe that employment and hence income will be more stable in the future. Thus it is a physiological response of