Reference no: EM13157563

This chapter argued that saving and spending behavior depended in part on wealth (accumulated savings and inheritance),but our simple model does not incorporate this effect. Consider the following model of a very simple economy = 10 + .75Y + .04WI = 100W = 1,000Y = C + IS = Y - CIf you assume that wealth (W) and investment (I) remain constant(we are ignoring the fact that saving adds to the stock ofwealth), what are the equilibrium levels of GDP (Y), consumption(C), and saving (S)? Now suppose that wealth increases by50 percent to 1,500. Recalculate the equilibrium levels of Y, C,andS.What impact does wealth accumulation have on GDP? Many were concerned with the very large increase in stock valuesin the late 1990s. Does this present a problem for the economy?Explain.

The increase of W changed Y =280 C=220 and S= 60. Wealth does raise GDP, and consumption, but a larger percentage goes into savings, rather than back into the market. 

As far as what happened in the 90s (1998 I am sure when the market crashed) the best answer I could come up with is that the market is always trying to balance out equilibrium. When you see high extremes, like prior to the crash, you will tend to see the economy take extreme measures to correct itself.

Another one that I cannot seem to process from being up all night is.... Assume in a simple economy that the level of Saving is -500 when aggregate output is zero and The MPS to save is .2 . Derive the savings and consumption functions, and draw a graph showing these functions.

What level of aggregate output does the consumption curve cross the 45 degree line