This chapter argues that saving and spending behavior depend in part on wealth (accumulated savings and inheritance), but our simple model does not incorporate this effect. Consider the following model of a simple economy: C = 50 + 0.8Y + 0.1W
I= 200
W=500
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 100 percent to 1,000. Recalculate the equilibrium levels of Y, C, and S. What impact does wealth accumulation have on GDP? Many were concerned with the large increase in stock values in the late 1990s. Does this present a problem for the economy? Explain.