Explain how a decrease in housing prices may reduce the wealth of some while increasing the wealth of others. What effect would this have on aggregate consumption?
What will be an ideal response?
A decrease in housing prices may reduce the wealth of older households and of households planning to purchase less expensive houses in the future. The decrease in housing wealth should reduce consumption of these households. A decrease in housing prices may increase the wealth of younger households that are more likely to be renters and households planning to purchase more expensive houses in the future. The decrease in housing prices means these households would have to save less from their current income to build the funds necessary to purchase a house. Therefore, wealth and consumption increase for these households. Whether aggregate consumption increase or decrease depends on the mix of households and the marginal propensity to consume out of wealth for each group of households.
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