Question

when median home prices of currently owned homes rise, the value of real wealth for these owners ________ and their aggregate demand ________.

	a.	decreases; decreases
	b.	increases; is unaffected
	c.	increases; increases
	d.	increases; decreases
	e.	is unaffected; is unaffected

Answer 1

Solution:-Option C is correct.

C.ncreases; increases

Explaination:-when median home prices of currently owned homes rise, the value of real wealth for these owners increases and their aggregate demand increases. The wealth effect looks at the impact of rising value of assets on consumer spending.A rise in house prices creates an increase in wealth for householders. As a consequence of this increase in house prices, householders will generally:Be more confident about spending and borrowing on credit cards. They can always sell their house in an emergency.Increase in equity withdrawal. A rise in house prices enables homeowners to take out a bigger mortgage. Banks can lend more on the basis of the increased price of the house. Households could use this bigger loan to spend on other items.