jep%2E24%2E4%2E21

A fall in house prices reduces the value of an asset

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: er of the services supplied by it. A fall in house prices reduces the value of an asset, but also reduces the cost of buying the stream of housing services that people were planning planning to purchase by exactly the same amount. It It is possible to have a nonzero effect on aggregate expenditure on other goods (when other prices remain unchanged), even without financial frictions, owing to redistribution of wealth between households with a net “long” position in housing and those with net “short” positions, if the average marginal propensities to consume out of wealth are different between the two types. Nonetheless, because the positive and negative wealth effects will largely offset one another, the effect on aggregate demand is likely to be fairly small relative to the size of the aggregate decrease in housing housing wealth. Larger Larger effects are instead possible if one recognizes that the losses resulting from the collapse of housing prices were disproportionately concentrated in certain financial institutions which play a role in the allocation of resources that cannot easily be repla...
View Full Document

Ask a homework question - tutors are online