Question

Suppose the wealth effect is such that a $10 change in wealth produces a $2 change in consumption at each level of income. Assume real estate prices tumble such that wealth declines by $160. Instructions: Enter your answers as whole numbers. a.What will be the new level of consumption at the $680 billion level of disposable income

Answer 1

Answer: $632 billion

Step-by-step explanation:

The wealth effect is such that a $10 change in wealth produces a $2 change in consumption. This means that for every change in wealth, we can expect a change of;

= 2/10

= 20 % of the wealth figure in consumption.

Real Estate prices have tumbled and prices decreased by $160.

That means that consumption decreased by;

= 160 * 20%

= $32

At the $680 billion level of disposable income, Consumption was $664 billion. The new Consumption figure is therefore;

= 664 - 32

= $632 billion