adds 7 cents to annual consumer spending (the 'wealth effect'), by how much did consumption decline when home prices fell by $2 trillion in 2006-2008?...
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Question

1- If every $1,000 increase in the real price of homes adds 7 cents to annual consumer

spending (the "wealth effect"), by how much did consumption decline when home prices

fell by $2 trillion in 2006-2008?


2- Suppose that investment demand increases by $300 billion in a closed and private economy

(no government or foreign trade). Assume further that households have a marginal

propensity to consume of 75 percent.


(a) Compute the four rounds of multiplier effects.


(b) What will be the final cumulative impact on spending?

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