Housing prices and balance sheets effects: A classroom demonstration

We describe a classroom demonstration in which students explore the relationship between collateral constraints and housing prices. By being actively involved in tracing the changes in consumer balance sheets, students gain a better understanding of the effects of asset prices on household wealth and the associated financial accelerator mechanism. Following the demonstration, students will be better prepared to discuss (a) how lower lending standards facilitated the housing bubble and then led to the 2007–2009 crisis; (b) the impact of irrational consumer expectations on macroeconomic activity during the inflation of the housing bubble; and (c) the role of the central bank in stabilizing asset prices and containing speculative actions of households.