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Suppose the wealth effect is such that a $10 change in wealth produces a $3 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 numbersa. What will be the new level of consumption at the $680 billion level of disposable income? $_____________________.b. What will be the new level of saving? $.____________________________

Answer :

Answer:

(a) $568

(b) $112

Explanation:

Missing information:

Table is missing, so it is attached with the answer.

(a) $10 change in wealth = $3 change in consumption at each level of income

$1 change in wealth = ($3 ÷ $10) change in consumption at each level of income

Therefore,

Wealth declines by $160 then consumption will fall by:

= 0.3 × $160

= $48

At the income level $680 billion, Original consumption is at $616, then the new level of consumption at the $680 billion level of disposable income:

= $616 - $48

= $568

(b) New level of savings after the decline in wealth:

= Disposable income - New level of consumption

= $680 billion - $568

= $112

Therefore, the household increases savings to offset the decline in wealth.

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