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

Question

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?

Answer 1

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