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:

C = 10 + .75Y + .04W

I = 100

W = 1,000

Y = C + I

S = Y - C

If you assume that wealth (W) and investment (I) remain constant (we are ignoring the fact that saving adds to the stock of wealth), what are the equilibrium levels of GDP (Y), consumption (C), and saving (S)?

Now suppose that wealth increases by 50 percent to 1,500. Recalculate the equilibrium levels of Y, C,and S.What impact does wealth accumulation have on GDP?

Many were concerned with the very large increase in stock values in the late 1990s. Does this present a problem for the economy?

Explain.