How did the decline in US home prices in 20068 affect aggreg

How did the decline in U.S. home prices in 2006-8 affect aggregate demand?

Solution

Answer) At the time of boom in housing industry value of homes increases significantly, this increase the expectations of homeowners for further increase in value. This will leads to increases in the borrowings against the value of homes. This leads to higher consumer spending.

When the values of homes start declining home owners expect more declines in the value in future and start reign in spending. This shift and affect aggregate demand.