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    the wealth effect

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    if every $1,000 increases in the real price of homes adds 5 cents to annual consumers spending (the "wealth effect"), by how much did consumption decline when home prices fell by $2 trillion in 2006-8?

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    Solution Preview

    Every $1000 increase in real home prices raises consumer spending by 5 cents.

    Home price decline ...

    Solution Summary

    This solution briefly demonstrates the wealth effect with an example.