Name: Jianjian
Instructor: Prosper Raynold
Course: ECO317
Date: 2013/12/7

Variation in Asset Prices and Macroeconomic Performance
For macoreconomic performance, it will be influenced by the variation in asset prices. In another word, the variation in asset prices refer to the change in household's wealth. We call the causal effect of exogenous changes in wealth upon consumption behavior as the wealth effect (Karl E. Case, John M. Quigley and Robert J. Shiller, 2001). In daily life, the house and stock price represent the major wealth for household, and in my following paper, I will introduce how house and stock price changes will influence the aggregate economic activity.
First of all, the theoretical basis for the important macroeconomic implications of house and stock price. The wealth effect can be divided to two categories, one is positive and another is nagetive. If the price of house and stock increase, for example, it exists a positve effect for househld. How this temporary positive effect affect the aggregate supply (work effort) and demand (consumption)? Because Here is the mechanism. Firstly we consider about the work effort. a. In response to the increase of wealth, household can produce more goods or services. And this will reduce household's leisure and increase the work effort relatively. But this effect will be very small relative to its magnitude if the incresement is perceived as temporary. This is an implication of the Permanant Income Hypothesis. b. The intratemporal substitution of work effort. I want to introduce a concept first, this concept is the Marginal Product of Labor (MPL). MPL is the amount of extra output generated by an extra unit of work. (Robert J. Barro, 2001). So we can find that in this case, the MPL will increase as wealth increase. Under this situation, the leisure is relatively more expensive. Because the return to