Home › AP Macroeconomics › Economics › The Aggregate Demand/Aggregate Supply Model › During the housing bubble, rising home values ma…
During the housing bubble, rising home values made homeowners feel wealthier and encouraged more borrowing against home equity and more spending. What did this rising perceived wealth do to the aggregate demand curve?
AShifted AD left, since debt levels were rising
BHad no measurable effect on aggregate demand
CShifted aggregate supply instead of aggregate demand
DShifted AD right, feeding low unemployment and growth
Answer & Solution
Correct answer: D. Shifted AD right, feeding low unemployment and growth
1. Rising home values raised perceived household wealth, which encouraged more consumption spending.
2. Increased home equity borrowing added even more spending on top of that.
3. More consumption and borrowing-fueled spending are demand-side changes, pushing the AD curve to the right.
4. This rightward AD shift is credited with contributing to low unemployment and growth during the bubble years.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.6 | Keynes’ Law and Say’s Law in the AD/AS Model_
Related questions
Alongside monetary policy, two federal laws were passed as a fiscal policy response to theIn response to the financial crisis following the housing bust, the Federal Reserve lowereWhen the housing bubble burst, overall household wealth dropped dramatically and credit maStill in the intermediate zone of the SRAS curve, what happens to output and the price levIn the intermediate zone of the SRAS curve, which is upward-sloping between the flat KeyneThe neoclassical zone sits at the far right of the SRAS curve, where it is nearly verticalThe Keynesian zone sits at the far left of the SRAS curve, where it is relatively flat andTwo possible triggers for inflationary pressure appear in the AD/AS model. What are they?