Modeling the Effect of Falling House Prices in the Multiplier Model
When a decline in house prices causes a household's wealth to fall below its target level, the household is likely to increase its savings to rebuild that wealth. Within the framework of the multiplier model, this behavioral response is formally represented as a decrease in autonomous consumption.
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Introduction to Macroeconomics Course
Ch.8 Economic dynamics: Financial and environmental crises - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Modeling the Effect of Falling House Prices in the Multiplier Model
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Household Response to Changing Asset Values
Imagine an economy experiences a sudden and substantial nationwide decrease in average home values. From the perspective of household behavior, what is the most likely immediate consequence for the economy's overall demand for goods and services?
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A national economy experiences a sustained and significant increase in average house prices. Which statement best analyzes the two primary channels through which this change is likely to affect household spending and thus increase aggregate demand?
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Consider two homeowners, both of whom see the value of their identical houses decrease by $50,000 during a market downturn. Homeowner X owns their house outright with no mortgage. Homeowner Y has a large mortgage and was already finding it difficult to secure additional loans. Which of the following statements most accurately analyzes the likely impact on their spending?
Match each event related to housing market fluctuations with its most direct consequence on household behavior and the resulting impact on the economy's overall demand.
A national housing market experiences a sharp and unexpected decline in prices. Arrange the following economic events into the logical sequence that describes how this shock transmits to the broader economy's demand for goods and services.
Learn After
An economy experiences a sharp, unexpected decline in average house prices. In response, many households feel their overall wealth is now below their desired long-term level and decide to save more out of their current income to compensate. Within the standard aggregate consumption function, how is this behavioral change initially represented?
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In an economic model where consumption depends on disposable income, a widespread decline in house prices that prompts households to increase their saving is represented by a decrease in the marginal propensity to consume.
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Tracing the Effects of a Negative Wealth Shock
An aggregate consumption function is given by C = c₀ + c₁Yd, where c₀ is autonomous consumption, c₁ is the marginal propensity to consume, and Yd is disposable income. Match each economic event to its most direct impact on the components of this function.
An economy's aggregate consumption is initially described by the equation C = 200 + 0.75Yd, where C is total consumption and Yd is disposable income. A sudden and significant drop in national property values occurs, leading households to increase their rate of saving to rebuild their target wealth. This behavioral shift results in a $50 billion decrease in consumption spending that is independent of any change in current income. What is the new equation for the aggregate consumption function?
An economy experiences a significant and unexpected drop in housing prices. Arrange the following events in the correct logical sequence to show how this shock is transmitted through the economy and represented in the aggregate consumption model.
A country's central bank is forecasting the economic impact of a recent, sharp decline in national house prices. To accurately predict the magnitude of the initial downward shift in the aggregate consumption function, which of the following pieces of information would be most essential for the bank's analysts to consider?
Rationale for Modeling Wealth Shocks