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From Blanchard et al. (2017). Macroeconomics: A European Perspective:

"When, in 2006, housing prices started declining in the USA, most economists forecast that this would lead to a decrease in demand, and a slowdown in growth."

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This is a terribly basic and stupid question, but I don't understand why the decline of housing prices would lead to a decrease in demand. Wouldn't demand increase as a response to the lower prices?

Equally, wouldn't the decrease in demand lead to the lowering of housing prices, and not the other way around?

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    $\begingroup$ Doesn't it actually say "a decrease in AGGREGATE demand"? In any case, it is not referring to the demand for houses, but demand for goods and services in general. If the price of my house falls then I am less wealthy and I will probably reduce my current consumption. $\endgroup$
    – smcc
    May 12 at 12:31
  • $\begingroup$ @smcc it really only says "decrease in demand". And how does this work in the practical sense? Are US Americans generally having their houses evaluated at such a rate that they see their houses are worth less than before, so they start saving in a way that leads to a significant decrease in the country's AD? $\endgroup$
    – maliebina
    May 12 at 13:40
  • $\begingroup$ The reason I queried the quotation is that I cannot find anything similar to the text in your quotation in Blanchard et al. (2017) "Macroeconomics: A European Perspective". Something similar does appear on page 184 (start of section 9.1) of the sixth edition of Blanchard and Johnson "Macroeconomics" but the wording is different: "When, in 2006, housing prices started declining in the United States, most economists forecast that this would lead to a decrease in aggregate demand and a slowdown in growth." $\endgroup$
    – smcc
    May 12 at 15:58
  • $\begingroup$ @smcc which edition? I included a screenshot of my online edition of the the 3rd edition. $\endgroup$
    – maliebina
    May 12 at 16:42

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Blanchard et al are not talking about housing demand but aggregate demand. That is clear from the context of the chapter.

  1. The sections 6.1-6.4 of chapter 6 examine how financial markets can affect aggregate demand through the lenses of IS-LM model. Section 6.5 is part of the same chapter.
  2. In section 6.5, in the sub-sub-chapter of 6.5 called Macroeconomic Implications it's explained that the reason why aggregate demand decreased was because this development resulted in lower consumer and firm confidence and higher interest rate (explained in previous sub-sub-chapters that are part of the sub-chapter 6.5).

You should always read the whole chapter before pausing and being puzzled over something. The rest of 6.5 makes it clear that the talk is not about housing demand but aggregate demand. While Blanchard et al could certainly be more precise, the rest of the sub-sub/sub chapter provides ample context.

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    $\begingroup$ I did read the entire chapter. I don't think I said otherwise in my post? I asked my question because regardless the sentence "...lead to a decrease in demand" could have been interpreted as referring to housing demand or even just a simple writing or editing mistake as often happens in publications. The author edited it to clarify he meant AG, that's because they received feedback to do so. If I were to interpret he was definitely referring to AG then that term should have been used. 'Demand' and 'aggregate demand' are two different terms with their own meaning. $\endgroup$
    – maliebina
    May 12 at 20:17
  • $\begingroup$ @maliebina yes and real GDP and GDP are also two different terms yet you will discover that even in many highly cited works authors sometimes just refer to GDP when they clearly mean real GDP. English is high context language, it is sometimes very difficult to be extremely precise, as opposed to lets say writing in German, without breaking natural flow of text. Here from the context its abundantly clear they mean AD $\endgroup$
    – 1muflon1
    May 12 at 20:27

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